Acct Chapter 18

Question 1

Difference between GAAP and IRS

Answer 1

numbers will just never match between the two since they report numbers differently; GAAP is on an accrual basis while tax is on a modified cash basis

Question 2

What is a temporary difference?

Answer 2

the difference between the tax basis of an asset or liability and its reported book amount in the financial statements which results in taxable or deductible amounts

Question 3

Future taxable amounts…

Answer 3

Deferred Tax liability; I underpaid the IRS now, will pay later

Question 4

Future deductible amounts

Answer 4

Deferred Tax asset; I overpaid the IRS now, will save later

Question 5

So in “temporary difference originates” when book income > taxable income (talk briefly about reversing)

Answer 5

This is DTL, and its an increase in DTL since you underpaid in taxes so you now owe more later. Reverse is that DTL will decrease

Question 6

So in “temporary difference originates” when book income < taxable income

Answer 6

This is DTA, and its an increase in DTA because since you overpaid for taxes you’re saving money later on. Reverse is that DTA will decrease

Question 7

Journal entry to record income taxes for DTL?

Answer 7

Debit income tax expense
Debit deferred tax liability
Credit Income tax payable

Question 8

Journal entry to record income taxes for DTL when its asking for the FIRST YEAR?

Answer 8

Debit income tax expense
Credit income taxes payable
Credit deferred tax liability

Question 9

What is DTA - valuation allowance

Answer 9

A company should reduce a DTA by a valuation allowance if it is more likely than not that it will not realize some portion or all of the deferred tax asset

This is at least slightly more than 50%

Question 10

Entry to record if more than likely than not will not be realized

Answer 10

debit income tax expense
credit allowance for deferred tax asset

*the only time allowance for dta would be credited is if the beg was 12,000 and the end was 9,000 our change went down by 3k we can use more of this asset now SO Basically if you now think you can use MORE of the DTA than before

Question 11

Formula to compute income tax expense?

Answer 11

income taxes payable/refundable +- Change in deferred income taxes

Question 12

Books recognized income first, IRS hasn’t taxed it yet

Answer 12

Liability (subtract for taxable income)

Question 13

Books recognized expense first, IRS won’t allow deduction yet (cunningham records $500k expense on books in 2020 because they estimate future warranty costs, IRS says you havent paid anyone yet)

Answer 13

Asset (overpaid taxes now)

Question 14

IRS taxed income first, books haven’t recognized it yet (landlord collects cash in december 2020 for rent covering all of 2021)

Answer 14

Asset (overpaid taxes now)

Question 15

IRS allowed deduction first, books haven’t expensed it yet (ex. MACRS accelerated depreciation)

Answer 15

Liability (underpaying taxes now)

Question 16

Permanent Differences

Answer 16

results from items that:
(1) enter into pretax financial income but never into taxable income or
(2) enter into taxable income but never into pretax financial income

Question 17

Permanent differences affect only __

Answer 17

the period in which they occur

Question 18

Examples: Permanent Differences — recognized on BOOKS but never by IRS

Answer 18

Municipal bond interest, expenses for tax exempt income, life insurance proceeds, life insurance premiums, fines

Question 19

Examples: Permanent Differences — recognized by IRS but never on BOOKS
Back

Answer 19

Percentage depletion of natural resources, dividends received deduction

Question 20

Steps to identify if creates DTA, DTL, or Permanent Difference?

Answer 20

Question 1: What happened on the books? Did they record revenue? Expense? or Loss?

Question 2: What did they IRS say about it? Did they agree or say not yet?

Question 3: Who recognized it FIRST? then you would apply the 4 rules memorized above

Question 21

Net operation loss

Answer 21

tax deductible expenses exceed taxable revenues

Question 22

Journal entry for a problem with loss carryforward without valuation allowance (so year of the loss)

Answer 22

Debit Deferred Tax asset
Credit Income Tax Expense (loss carryforward)

this number is the number times the enacted future tax rate

Question 23

Journal entry for carryforward in the next year

Answer 23

Debit Income tax expense
Credit deferred tax asset
Credit income tax payable

income tax expense is the years taxable income its asking for x the tax rate
deferred tax asset is the same from prev. year
income tax payable is this years taxable income loss minus last years times the tax rate of the year its asking for

*look at 8-9 for this type of problem

Question 24

What is a valuation allowance

Answer 24

A reduction of DTA when you’re unlikely to use it.

Question 25

3 Sources of Future Taxable Income (for asset to be usable)

Answer 25

1. Future reversals of existing DTLs, 2. Future profitable operations, 3. Tax planning strategies

Question 26

Positive Evidence (reasons NOT to need valuation allowance)

Answer 26

1. Existing contracts guaranteeing future income, 2. Assets worth more than tax basis, 3. Strong earnings history and the loss was a one time fluke

Question 27

Negative Evidence (reasons TO create valuation allowance)

Answer 27

1. History of losses, 2. Expecting losses soon, 3. Unsettled problems threatening future profits, 4. Carryforward period too short to use it

Question 28

Components of Income Tax Expense on Income Statement

Answer 28

Two parts Current (= taxes payable to IRS now; so could be income taxes payable) + Deferred (= change in DTA/DTL). Total = Current + Deferred

Question 29

a net operating loss carried forward creates what

Answer 29

a deferred tax asset

Question 30

how to calculate income tax payable

Answer 30

taxable income multiplied by enacted tax rate

Question 31

Journal entry to record income taxes when you have DTA, DTL...

Answer 31

Debit income tax expense Credit Income tax payable now for dta and dtl.. if dta is going up its debited if dtl is going up its being credit Example: if the dtl says its reversing, that means its being paid off so its going down so then you'd debit income tax payable is taxable income times tax rate income tax expense is that plug add all numbers up to get that

Question 32

test yourself on mary greene question 13 and 14. what is the journal entry to record taxes? A company has only one temporary difference at the end of 2013 resulting in future taxable amounts of $22,000 in 2014, $40,000 in 2015, and $60,000 in 2016. Pretax financial income is $350,000 in 2013. The tax rate for all years is 35%

Answer 32

Debit income tax expense Credit deferred tax liability Credit Income tax payable