F5 DTA/L

Question 1

How do you calculate and update Noncontrolling Interest (NCI)?

Answer 1

🔹 Step 1: NCI at Acquisition
👉 NCI = % not owned × FV of subsidiary

Example:
Parent owns 90% → NCI = 10%
FV of subsidiary = 500,000
NCI = 10% × 500,000 = 50,000

🔹 Step 2: After Acquisition
👉 NCI changes each period based on share of NI and dividends

🔹 Eg
Beginning NCI = 50,000
Sub NI = 100,000
Dividends = 20,000

NCI share:
NI: 10% × 100,000 = 10,000
Div: 10% × 20,000 = (2,000)

Ending NCI:
50K + 10K - 2K = 58K

🔹 Income Statement
👉 Show:
Consolidated net income
Less: NCI share of income

Question 2

What is Noncontrolling Interest (NCI) and how is it presented in consolidation?

Answer 2

👉 The portion of a subsidiary NOT owned by the parent

ie, Parent owns 90% → NCI = 10%

👉 Reported on Equity section of the consolidated balance sheet
✔️ Separate from parent’s equity
❌ Not a liability
❌ Not combined with parent equity

👉 b/c Consolidation treats the group as one entity, but:
-Parent does NOT own 100%
- So part of equity belongs to other owners

🔹 NCI includes:
- Share of subsidiary NA (@ FV)
Share of subsidiary income

🔹 Income Statement Impact
👉 Report:
NI (total) minus NI attributable to NCI

⚠️ Exam Traps
❌ Calling NCI a liability
❌ Eliminating NCI
❌ Combining NCI with parent equity

Question 3

What is the full consolidation JE @ acquisition (incl GW and NCI)?

Answer 3

🔹 Step 1: Core Structure
👉 Eliminate the investment and replace with underlying assets/liabilities:

Dr Identifiable assets (at FV)
Dr GW (plug)
Cr Liabilities (at FV)
Cr Investment in Subsidiary
Cr NCI (if <100% owned)

🔹 Step 2: GW Formula
GW = what you paid minus what the company is worth (@ FV)

🔹 Step 3: NCI (if less than 100%)
👉 NCI = the part you don’t own
Eg:
You own 80% → NCI owns 20%

If company is worth 450,000
👉 NCI = 20% × 450,000 = 90,000

🔹 Example
Parent pays 500,000
FV of net assets = 450,000
Owns 100%

Goodwill = 500K - 450K = 50K

JE:
Dr Assets (FV)………….XXX
Dr Goodwill……………..50,000
Cr Liabilities…………..XXX
Cr Investment…………..500,000

🔹 Key Logic

👉 Remove Investment account
👉 Replace with actual assets + goodwill

⚠️ Exam Traps
❌ Crediting retained earnings (never do this)
❌ Forgetting NCI when <100%

👉 Consolidation =
Replace investment with FV assets + goodwill (plug)

Question 4

If GW was not recorded in a consolidation, what is the correcting journal entry?

Answer 4

🔹 Step 1: Understand the situation
👉 The full consolidation entry s/ have incl’d:

Assets at FV
GW (plug)
Investment elimination

But goodwill was omitted, so the investment account is too high

🔹 Step 2: Correct the imbalance
👉 Add the missing GW and reduce the investment:

Dr Goodwill
Cr Investment in Subsidiary

🔹 Eg
Purchase price = 500,000
FV of NA = 450,000
Missing goodwill = 50,000

Dr Goodwill………….50,000
Cr Investment………..50,000

⚠️ Exam Traps
❌ Crediting RE

Question 5

How are intercompany transactions and balances handled in consolidation?

Answer 5

👉 Eliminate ALL intercompany balances and transactions b/c they are treated as one entity and the com cannot owe itself or earn from itself

🔹 What gets eliminated?
✔️ Intercompany receivables/payables
✔️ Intercompany rev / exp
✔️ Intercompany interest (receivable / payable, inc /exp)
✔️ Intercompany sales (and unrealized profit in inventory)

🔹 Basic Elimination Entry Pattern
👉 Remove both sides:

Dr Liability / Revenue
Cr Asset / Expense

🔹 Example
Intercompany interest:

Dr Interest Payable
Cr Interest Receivable

👉 Reduces:
Current liabilities
Current assets

Question 6

What are permanent differences, and how do you identify them vs temporary differences?

Answer 6

👉 Permanent diff = NEVER reverse
👉 Temporary diff = WILL reverse over time

🔹 Permanent Diff
- Life insurance premiums for key com officers
- Fines, penalties, and bribes
- Muni bond interest (tax exempt int)
- nondeductible portion of meals & entertainment

🔹 Temporary Diff - create DTA/L
👉 Timing differences between book and tax

Question 7

What items affect current income tax expense vs deferred tax expense or other expenses?

Answer 7

👉 CY inc tax exp = based on THIS year’s taxable income and THIS year’s tax rate

✔️ Change in CY tax rate
✔️ Items affecting current taxable income

🔹 Does NOT Affect Current Tax Expense:
- DTA/L
- Change in tax rate for future years

Question 8

How do you calculate current income tax expense when given both book income and taxable income?

Answer 8

👉 Current tax exp = Taxable income × tax rate (what you owe IRS rn)

🔹 What to IGNORE
❌ Pretax FS income
❌ Perm diff (e.g., nondeductible exp)
❌ Temp diff (these affect deferred taxes ONLY)

Taxable income = 400,000
Tax rate = 30%
Pretax FS income = $300,000
Diff –> $60K nondeductible premiums on officers’ life ins & $40K def rental inc

👉 Current tax expense = 120K (400K * 30%)

🔹 What the Differences Mean (but IGNORE for this question)
60K life insurance → permanent diff
40K rent in advance → temp diff

Question 9

What creates a deferred tax asset (DTA)?

Answer 9

temp diff that causes:
👉 Pay more tax now, less later
👉 Creates a DTA

A DTA happens when:
- taxable income > book / fin income

1) book exp first, tax exp later (accrued expense)(exp rec this yr, ded next yr)
- bad debt exp
- est liab / wty exp
- startup exp

2) tax income first, book inc later
eg, PP Assets or prepaid revenue

Ask: “Am I paying extra tax now that I get back later?” Yes → DTA

Question 10

What creates a deferred tax liability (DTL)?

Answer 10

👉 DTL = tax break now, tax bill later

🔹 DTL happens when:
Book income > taxable income now

1) Book revenue 1st, Tax Inc later
- installment sales
-rent receivable
- contractor accting
- equity method: undist. div.

2) Tax deduction NOW, book exp later
- depr exp
- amort franchise
- pp expense ie rent

Ask: 👉 “Am I paying less tax now, but I’ll have to pay more later?” YES → DTL

Question 11

How do you interpret “book basis over (under) tax basis” when calculating DTAs/DTLs?

Answer 11

🔹 What the Phrase Meand 👉 It is the temp diff already calculated for you

“Over” = Book > Tax –> DTL
“Under” = Book < Tax –> DTA

👉 You do NOT recalculate anything
👉 Use the given difference directly
👉 Multiply by tax rate

🔹 Why This Question = TRICKY
❌ You see components (e.g., installment receivables = DTL)
❌ You try to separate DTA vs DTL
👉 BUT:
✔️ The table already netted everything
🔹 So IGNORE
❌ Ind acct logic (wty, installment, etc.)
❌ Whether something “feels like” DTL

Question 12

When do you use the enacted tax rate vs the effective tax rate?

Answer 12

🔹 Enacted Tax Rate = deferred taxes (future)
👉 Tax rate passed into law

🔹 Effective Tax Rate = Actual tax % based on book income (current)
👉 Used for: Current tax exp & INTERIM Reporting

** choose enacted rate for yr you expect reversal

Question 13

A company reports:

• Income from cont oper = 130K
• Tax depreciation exceeds book depreciation by 12,500
• Warranty accrual exceeds actual repairs by 8,300
  Enacted tax rate = 20%

👉 What is income taxes payable?

Answer 13

🔹 Step 1: ID Temp Diff
Depreciation (12,500)
Tax deduction > book expense
👉 Pay less tax now, more later = DTL
= 12,500 × 20% = 2,500 DTL

Warranty (8,300)
Book expense > tax deduction (not deductible yet)
👉 Pay more tax now, less later = DTA
= 8,300 × 20% = 1,660 DTA

🔹 Step 2: Net Deferred Taxes
2,500 - 1,660 = 840 net DTL increase

🔹 Step 3: Calculate Inc Tax Exp
👉 Based on book income
= 130,000 × 20% = 26,000

🔹 Step 4: JE
Dr Income Tax Expense……..26,000
Cr Deferred Tax Liability……840
Cr Income Tax Payable……25,160

👉 Tax expense = book-based
👉 Tax payable = tax return (cash owed)
👉 Difference = deferred taxes

Question 14

Are DTA and DTL already net of tax?

Answer 14

👉 YES — DTA/DTL are already tax-affected amounts

🔹 How They’re Created
Temporary Difference × Tax Rate = DTA/L

🔹 What This Means
DTA/L balances = future tax effect
You DO NOT multiply by tax rate again

Question 15

What is intraperiod income tax allocation, and when is it used?

Answer 15

👉 on I/S assigning total income tax exp to diff components:

• Income from cont oper
• Disco operations
• OCI
• Extraordinary items (if tested conceptually)

🔹 What Does NOT Use Intraperiod Allocation:
- operating inc (reported b4 tax)

Question 16

What is a tax position, and what is NOT considered a tax position?

Answer 16

👉 tax position = a decision taken in a tax return that affects taxable inc

🔹 Examples of Tax Positions
✔️ Characterizing income (include vs exclude)
✔️ Claiming income as tax-exempt
✔️ Allocating income between jurisdictions
✔️ Classifying transactions or entities

🔹 What is NOT a Tax Position
❌ Assumptions or audit about the IRS authority and what they will do

🔹 Key Distinction
Tax position = WHAT you did on the return
Recognition rules = HOW you evaluate it

Question 17

West Corp. received $36K rent on June 15 for a lease beginning July 1 (annual lease).

Rent is taxable when received
Tax rates: 30% current, 21% future
Year-end: Dec 31

👉 What is the Deferred Tax Asset (DTA)?

Answer 17

= 18K * 21% =3.78 K

🔹 Step 1: Book Income (earned)
6 months earned (July–Dec):
36,000 × 6/12 = 18,000

🔹 Step 2: Taxable Income
Taxed when received:
36,000

🔹 Step 3: Temporary Difference
36,000 - 18,000 = 18,000

👉 Tax > Book → paid more tax now
👉 Creates DTA

🔹 Step 4: Use FUTURE Tax Rate
Reverses next year → use 21%

🔹 Step 5: Calculate DTA
18,000 × 21% = 3,780

🔹 Key Insight
Cash received early → taxed early
Revenue recognized later → tax benefit later

Question 18

How is income tax expense calculated in an interim period?

Answer 18

= Interim pretax income * expected ANNUAL EFFECTIVE tax rate

🔹 What NOT to Use
❌ Prior year effective tax rate
❌ Current QTR effective tax rate
❌ Statutory tax rate

Question 19

How do you calculate the effective tax rate when permanent differences exist?

eg, NI, b4 taxes = $200K, incl
- $20K int rev from muni bonds
- $10K pd officers’ life ins prem, com is beneficiary
- CY tax rate = 30%

Answer 19

= 190K * 30% = 57 K

👉 Effective tax rate = tax exp ÷ pretax book inc

👉 Permanent differences make it different from the statutory rate

🔹 Step 1: Start with pretax book inc
Pretax book income = 200,000

🔹 Step 2: Adj for permanent differences to get taxable income

Municipal bond interest = not taxable → subtract 20K

Officers’ life insurance premiums (company is beneficiary) = not deductible → add 10K

= 200K - 20K + 10K = 190K tax inc

🔹 Step 3: Compute income tax expense = 190K × 30% = 57K tax exp

🔹 Step 4: Compute effective tax rate –> 57K / 200K = 28.5%

Question 20

If a company reports a DTA:

• Will reversals be taxable or deductible?
• What does it imply about current profitability?

Answer 20

👉 DTA reverses into:
✔️ Future deductible amounts

🔹 Profit vs Loss Insight
👉 If a DTA is reported (no valuation allowance mentioned):
✔️ Com likely has taxable profit b/c DTA requires future income to use
— If losses existed → likely need valuation allowance

Question 21

How do you determine DTA vs DTL when income and losses occur across multiple years?

Answer 21

DTL/DTA = cumulative temp diff (netted over time)

THEN apply direction:
- Book income recognized first → DTL
- Tax income recognized first → DTA

Question 22

eg, Y1: Recognized profit over time on a construction contract
- Customer controls asset over time (→ rev recognized early for book)
- Tax: same revenue recognized in Y1+

Y2: Expected overall loss → recognized loss equal to ½ of Year 1 profit

👉 At end of Y2, does Cody report a DTA or DTL?

Answer 22

👉 DTL/DTA is based on cumulative timing differences (NOT just current year)

🔹 Step 1: Year 1
Book recognizes revenue over time
👉 Signals early recognition of income
👉 Creates: DTL (book income ahead of tax overall timing)

🔹 Step 2: Y2 loss recognized = ½ of Year 1 profit
👉 This reduces prior difference
BUT: Does NOT fully reverse it

🔹 Step 3: Cumulative Position
👉 Across both years:
- Book income (net) still ahead of tax

🔹 Final Answer
DTA → ❌ No
DTL → ✅ Yes (smaller than Y1, but still exists)

Question 23

Shin Co. (Year 2):

Income taxes payable = 13,000
DTA before allowance = 20,000
Prior year DTA = 15,000
10% of DTA not realizable

👉 What is total income tax expense?

Answer 23

JE Y2
Dr Income Tax Exp …………. 10,000
Dr Deferred Tax Asset …………. 3,000
  Cr Income Taxes Pay……. 13,000

👉 Reduces DTA when not fully realizable - valuation allowance
👉 Tax Expense = Payable − ΔDTA + ΔDTL

🔹 Step 1: Apply Valuation Allowance
= 20K × 10% = 2K
Net DTA = 20K - 2K = 18K

🔹 Step 2: Change in Net DTA
= 18k - 15k = 3k increase

🔹 Step 3: Compute Tax Expense
👉 Formula: Tax Exp = Current Tax Payable - Net DTA
= 13K - 3K = 10K tax exp

Question 24

What is the difference between current provision for income taxes and total income tax expense?

Answer 24

• Current provision = taxable income × tax rate
• Total income tax expense = current provision ± deferred tax exp

If the question says:
- current provision
- current portion
- income taxes payable
→ think taxable income × tax rate

If it says:
-total income tax exp
- income statement tax expense
→ think current ± deferred

Question 25

How do you calculate current income tax expense vs total income tax expense?

Answer 25

- Current income tax exp = taxable income × current enacted (statutory) tax rate - Total income tax exp = current tax exp ± deferred tax exp

Question 26

How do NOL carrybacks and carryforwards affect financial statements?

Answer 26

🔹 NOL: Net OPER Loss, recorded at tax benefit amt, not loss amt - Eg NOL = 10k, tax 30%, receivable / DTA = 3k 👉 Carryback = cash refund (receivable) Dr Income Tax Refund Receivable 3K Cr Income Tax Benefit (or Exp) 3K 👉 Carryforward = future benefit (DTA) Dr Deferred Tax Asset (DTA) 3K Cr Income Tax Benefit (or Exp) 3K Carryback = optional (if allowed), Carryforward = default

Question 27

Explain NOL carryforward: what happens in Year 1 vs future years (80% rule + DTA + journal entries)?

Answer 27

Year 1 (Loss Year) - DTA = NOL × tax rate - Record full benefit immediately Future Years (Profit Years) 1. Apply 80% rule - NOL usage is limited to: 80% * current taxable income 2. Reduce taxable income - Taxable income ↓ by NOL used 3. Reverse DTA - DTA ↓ by NOL used * tax rate 📘JE Y1 — NOL Generated Dr DTA 30K Cr Income Tax Benefit 30K Y2 — Partial Use (80% Limit Applies) - Taxable income = 60K - Max NOL usable = 48K - Taxable after NOL = 12K Dr Income Tax Expense 18K Cr Deferred Tax Asset 14.4K Cr Income Tax Payable 3.6K YEAR 3 — Remaining NOL Used - Use remaining NOL (52K) Dr Income Tax Expense 24K Cr Deferred Tax Asset 15.6K Cr Income Tax Payable 8.4K

Question 28

Cahn expenses organization costs immediately for books and amortizes over 15 years for tax and has no other temp diff 👉 Should Cahn report current and noncurrent DTAs at the end of Year 1 and Year 14?

Answer 28

NO!! Trick Q 👉 ALL DTAs & DTLs are NONCURRENT

Question 29

What is the difference between a temporary difference, a DTL/DTA, and income tax payable?

Answer 29

🔹 The 3 Layers (VERY IMP) 1️⃣ Temp Diff (raw difference) 👉 This is the amt diff between book & tax 2️⃣ DTL / DTA (tax effect) 👉 This is: Temp diff * tax rate 3️⃣ Tax Payable 👉 Based on: Taxable inc * tax rate Pretax book income = 200K Muni income → (10K) Extra tax depreciation → (20K) ---> Taxable Income: 200K - 10K - 20K = 170K ---> Tax Payable: 170K * 30% = 51K ---> DTL: 20K * 30% = 6K

Question 30

How do you calculate the DTL when an equity-method investee’s undistributed earnings will be paid as dividends and the dividends qualify for the 65% dividends received deduction (DRD)?

Answer 30

👉 Start with the book / tax diff 👉 Then remove the permanent difference (DRD) from both 👉 The remainder is the temp diff 🔹 Why this is tricky - Book recognizes: equity in earnings - Tax recognizes: dividends received - DRD is a permanent difference, so it must be excluded from the temp diff 🔹 Example - Equity in earnings (book) = 180K - Dividends received (tax) = 30K - DRD = 65% 👉 Step 1: Start with book vs tax • Book = 180,000 • Tax = 30,000 👉 Step 2: Remove the DRD (perm diff) 👉 Book side: - DRD = 180,000 × 65% = 117,000 perm diff - Adj book = 180K − 117K = 63K temp diff 👉 Tax side: - DRD = 30,000 × 65% = 19,500 perm diff - Adj tax = 30K − 19,500 = 10,500 temp diff 👉 Step 3: Temporary difference cf between book and tax = 63,000 − 10,500 = 52,500 👉 Step 4: DTL = 52,500 × 21% = 11,025 J

Question 31

How do you calculate deferred tax expense when: - Temp diff are cumulative, and - The tax rate changes?

Answer 31

1️⃣ Find TOTAL cumulative diff at YE 👉 Year 1 difference = 200K 👉 Year 2 adds = 100L Total = 300K 2️⃣ Apply CURRENT (new) enacted rate to TOTAL 👉 Use current/future rate, NOT old rate = 300K * 30% = 90K ending total DTL for CY 3️⃣ Cf to what you already had 👉 Beginning DTL (Y1 end) = 200K * 20% = 40K 4️⃣ The difference = deferred tax expense 90K - 40K = 50K “What is my TOTAL difference today worth at TODAY’S tax rate?” 👉 “Cumulative difference × current rate = ending DTL” 👉 “Minus beginning DTL = deferred exp” ⚠️ Exam Trap ❌ Mixing rates across pieces ❌ Only applying new rate to new differences

Question 32

What is a valuation allowance, and how is it accounted for?

Answer 32

👉 A valuation allowance reduces a DTA when it is MORE LIKELY THEN NOT (>50%) the DTA will NOT be realized 👉 Evidence to evaluate: - Positive evidence (future profits, history) - Negative evidence (losses, uncertainty) 👉 Any change is recorded in: ✔️ Inc from cont oper 👉 Valuation allowance = “we probably won’t get it” 🔄 If the Allowance INCREASED Dr Income Tax Expense Cr Valuation Allowance (contra-DTA) 🔄 If the Allowance DECREASES Dr Valuation Allowance Cr Income Tax Expense

Question 33

Pretax income = 1,400 Temporary differences: Depr = (800) → reverses in Y3 Wty = 400 → reverses: - 100 in Year 2 - 300 in Year 3 Tax rates: Year 2 = 20% Year 3 = 18% 👉 What is deferred tax exp (Y1)?

Answer 33

🔹 Step 1: Match diff to reversal yrs - Depreciation (800) → Y3 ((Y2 = (1200), then Y3 = 2000, which is the yr of reversal)) - Warranty 400: 100 → Year 2 300 → Year 3 🔹 Step 2: Apply FUTURE tax rates - Depreciation → DTL 800 × 18% = 144 - Wty → DTA Y2: 100 × 20% = 20 Y3: 300 × 18% = 54 Total DTA: 20 + 54 = 74 🔹 Step 3: Net them DTL - DTA = 144 - 74 = 70 👉 Deferred tax expense = 70 Dr. Tax exp—current 210 Dr. Tax exp—deferred 70 Dr DTA 74 Cr DTL 144 Cr Tax Payable 210

Question 34

- Inc b4 depr & taxes = 100,000 - Book depr (St8) = 12,000 - Tax depr = 20,000 - Tax rate = 30% 👉 What is current income tax liability?

Answer 34

= 80K * 30% =24 K 👉 Taxable inc uses TAX rules, not book (GAAP) rules 🔹 Step 1: Start with income b4 depr --> 100K 🔹 Step 2: Subtract TAX depreciation --> 100K - 20K = 80K 👉 Do NOT use book depreciation (12K) 🔹 Step 3: Compute tax liability --> 80K * 30% = 24K 👉 “Am I solving for PAYABLE?” ✔️ YES → use tax rules only ❌ NO → then think about book 🔹 What Book Depreciation Is Only for: - Financial statements - Temporary differences (DTL/DTA)

Question 35

(End of Year 9): Book basis = 1,500 Tax basis = 500 Tax rate (through Year 10) = 30% Tax rate = 35% Y11 bought Y1 w/ 10 yr useful life 👉 What amount is used to calculate the DTL reversal in Y10?

Answer 35

= 1000 * 30% = 300 Dr. DTL 👉 Deferred taxes are based on the TEMPORARY DIFFERENCE Temp diff = Book basis - Tax basis 🔹 Step 1: Find the difference 1,500 - 500 = 1,000 👉 This is the ONLY number that matters 🔹 Step 2: Apply tax rate 1,000 × 30% = 300 👉 DTL = 300 🔹 Step 3: Final Year Entry (Year 10) 👉 Diff fully reverses → eliminate DTL b/c fully reversed, Y11 rate ≠ relevant

Question 36

- Taxable income = 900K - Wty exp recorded for books = 400K - Wty payments begin in Y2 @ 100K / yr - Com expects enough income in Y2 and Y3, but likely losses after Y3 - Tax rate = 25% 👉 What is income tax exp in Y1? Incl JEs?

Answer 36

🔹 Step 1: Current tax payable 900K × 25% = 225K 🔹 Step 2: DTA for wty = 400K * 25% = 100K gross DTA 🔹 Step 3: Valuation allowance - only 200K of wty deduction is likely realizable. Realizable DTA: 200K * 25% = 50K Gross DTA = 100,000 Realizable DTA = 50,000 👉 Valuation allowance: = 100K - 50K = 50K 🔹 Step 4: Net DTA recognized = 100K - 50K = 50K 🔹 Step 5: Income tax expense = 225K - 50K = 175K Dr Income Tax Expense........175,000 Dr Deferred Tax Asset........100,000 Cr Valuation Allowance....50,000 Cr Inc Tax Payable........225,000

Question 37

How do I determine whether I have a DTA or DTL using book vs tax income?

Answer 37

👉 “I look at taxable income” 👉 “If I’m paying LESS tax NOW” 👉 👉 DTL 🔹 Step 1: Calculate BOTH incomes 👉 Book income (GAAP) 👉 Taxable income (IRS) 🔹 Step 2: Focus ONLY on TAXABLE income “What income am I actually being taxed on?” 🔹 Step 3: Cf Taxable income vs Book income 🔹 Step 4: Ask the key question 👉 “Am I paying MORE or LESS tax NOW?” 🔹 Step 5: Decide 👉 More tax NOW = DTA Taxable income > Book income 👉 Less tax NOW = DTL Taxable income < Book income 🔹 Eg Book income = 5,800 Taxable income = 1,000 👉 Taxable < Book 👉 Paying LESS tax now ✔️ DTL 👉 “What is IRS taxing me on?” 👉 “Is that higher or lower than book?” 👉 “Am I paying more or less NOW?”

Question 38

A company has an existing DTA from prior years. In the CY, the pattern flips (taxable income < book income). 👉 What is the JE?

Answer 38

🧠 The Core Rule 👉 You don’t book based on the current pattern alone 👉 You book based on what actually exists on B/S 👉 Opposite pattern = reverse the existing deferred account (don’t create a new one) 🔹 Step 1: Identify what exists 👉 Existing balance = $$ DTA 🔹 Step 2: Identify CURRENT pattern 👉 Taxable income < Book income 👉 This is a DTL-type pattern 🔹 Step 3: Interpret correctly ❌ Do NOT create a DTL ✔️ This is a reversal of the existing DTA 🔹 Step 4: JE Dr Income Tax Expense Cr Deferred Tax Asset 👉 You are losing a future tax benefit, ie DTA decreases even the CY had a DTL 🧩 When WOULD you book a DTL? 👉 Only when BOTH are true: 1. You have a DTL-type pattern 2. You do NOT already have a DTA being reversed

Question 39

How do I go from book income → taxable income?

Answer 39

👉 Taxable income = book income adj'd for BOTH permanent and temp diff 🔹 Step 1: Start with book income 👉 Pretax financial income 🔹 Step 2: Adj for PERMANENT diff (never taxed) - Muni bond int → subtract - Life ins premiums (com = beneficiary) → add - Fines & penalties → NOT deductible → add - Dividends received deduction (DRD) → partially NOT taxable → subtract 🔹 Step 3: Adj for TEMP diff 👉 “What does the IRS include NOW?” 🔁 Revenue timing differences - Rent rec'd in advance ++ → Taxed now, book later → add - Installment sales → Book now, tax later → subtract 🔁 Expense timing differences - DEPR DIFF → Tax > Book → subtract → Book > Tax → add - WTY EXP ++ → Book now, tax later → add - BAD DEBT (allowance vs write-off) ++ → Book now, tax later → add - ACCRUED EXP (e.g., compensation, int) ++ → Book now, tax later → add 🔹 Example Book income = 90,000 − Muni income (20,000) + Rent received early 16,000 − Extra tax depreciation 10,000 = 76,000 🔹 Step 4: Tax payable = 76K * tax rate 👉 Taxable income = book income adj'd for BOTH permanent and temp diff

Question 40

When adjusting book income → taxable income, how do I know whether to ADD or SUBTRACT a temporary difference?

Answer 40

👉 ADD or SUBTRACT depends ONLY on what the IRS recognized vs book ONLY question 👉 “Did the IRS recognize MORE or LESS than book?” 🔹 If IRS recognizes MORE 👉 Taxable income is HIGHER ✔️ ADD to book income eg, rent received in advance (taxed now) 🔹 If IRS recognizes LESS 👉 Taxable income is LOWER ✔️ SUBTRACT from book income eg, extra tax depreciation 👉 “IRS more → ADD” 👉 “IRS less → SUBTRACT”

Question 41

What is the conceptual basis for deferred tax accounting?

Answer 41

👉 Recognition of assets and liabilities b/c DTA/L create assets and liabilities 🔹 NOT based on ❌ Matching income and expenses ❌ Tax planning strategies ❌ Simplicity/objectivity 📌 Quick mental distinction - Matching → I/S mindset - Deferred taxes → B/S mindset 👉 “Deferred taxes are GAAP, but specifically balance sheet driven, not matching driven”

Question 42

When do you apply the DRD (div reduction deductible) in investments?

Answer 42

👉 Apply DRD ONLY when tax recognizes dividend income - Cost method → YES DRD, no DTA/L - Equity method → YES DRD (on dividends) - Consolidation → NO DRD 1. Cost Method (<20%) • Book = dividend income • Tax = dividend income • 👉 DRD applies ✅ Permanent difference only 🚫 No DTA/DTL 2. Equity Method (20–50%) • Book = equity in earnings • Tax = dividends received 👉 DRD applies to dividends (tax side) ✅ Creates: - Permanent difference (DRD) - Temporary difference (timing of earnings vs dividends)

Question 43

Taxable income = 400,000 Pretax financial statement income = 300,000 Difference due to: 60,000 nondeductible life insurance premiums 40,000 rent received in advance Tax rate = 30% 👉 What is income tax expense — current portion?

Answer 43

👉 Current portion = taxable inc * tax rate = 400K × 30% = 120K ❌ Your brain wants to solve: DTA/DTL total tax exp perm vs temp diff 👉 But the question only asks for: current portion And taxable inc is already given If taxable inc is already provided, do NOT rebuild it from: - pretax book income - perm diff - temp diff ** Unless the question asks for total tax exp or deferred tax

Question 44

Given a timing difference, how do I quickly determine: 👉 DTA or DTL?

Answer 44

📌 Your corrected mental script 👉 “If tax deduction is delayed → I pay MORE now → DTA” 👉 “If tax deduction is early → I pay LESS now → DTL” 👉 “Am I paying MORE or LESS tax NOW?” 🔹 Example (DTA) Expense: -Book now, tax later 👉 Taxable income higher now 👉 Pay MORE now, ✔️ DTA 🔹 Example (DTL) Revenue: - Book now, tax later 👉 Taxable income lower now 👉 Pay LESS now, ✔️ DTL 🔹 Permanent differences 👉 Never reverse, ✔️ No DTA/DTL

Question 45

When calculating current income tax liability, which depreciation amount do you use?

Answer 45

Use the CY tax depreciation only. Y2 inc before dep/tax = 100K Year 2 tax depreciation = 20K Taxable inc = 100K - 20K = 80K Tax liability: 80K * 30% = 24K

Question 46

When calculating DTA/DTL, which tax rate do I use?

Answer 46

👉 Deferred taxes are measured using the FUTURE tax rate when the difference reverses 🔹 Example Depreciation: Y1 (800), Y2 (1,200), Y3 +2,000 👉 Reverses in Year 3 ✔️ Use Year 3 rate (18%) Warranty: Y1 400, Y2 (100), Y3 (300) Reverses: 100 in Year 2 → use 20% 300 in Year 3 → use 18%

Question 47

When calculating a valuation allowance, do I use: 👉 Realizable portion OR 👉 Unrealizable portion?

Answer 47

👉 Use the UNREALIZABLE portion Valuation Allowance = UNrealizable amount * tax rate ## 🔹 Example Total temp diff = 400,000 Realizable = 200,000 Unrealizable = 200,000 = 200,000 × 25% = 50,000 Dr Income Tax Expense Cr Valuation Allowance 🔹 Key Rule 👉 Record a valuation allowance when: “More likely than not” (>50%) that part of DTA will NOT be realized

Question 48

Bard Co.: Q1 pretax income = 10,000 Q1 tax exp = 1,500 Q2 pretax income = 20,000 Estimated annual effective tax rate at end of Q2 = 25% 👉 What is Q2 income tax exp?

Answer 48

👉 Interim tax expense = YTD tax − previously recorded tax = 10K + 20K = 30K total income * 25% = 7500 - 1500 = 6K YTD pretax income * est annual EFFECTIVE tax rate Then, current qtr tax exp = YTD tax expense - prior qtr tax exp already recorded ⚠️ Exam Traps ❌ Using only current qtr income ❌ Forgetting to subtract prior qtr tax exp ❌ Using statutory rate instead of estimated annual effective rate