Kế toán, kiểm toán - Chapter 19: Accounting for income taxes

Volume 2 H A P T E R 19ACCOUNTING FOR INCOME TAXESIntermediate AccountingIFRS EditionKieso, Weygandt, and Warfield differences between pretax financial income and taxable income.Describe a temporary difference that results in future taxable amounts.Describe a temporary difference that results in future deductible amounts.Explain the non-recognition of a deferred tax asset.Describe the presentation of income tax expense in the income statement.Describe various temporary and permanent differences.Explain the effect of various tax rates and tax rate changes on deferred income taxes.Apply accounting procedures for a loss carryback and a loss carryforward.Describe the presentation of income taxes in financial statements.Indicate the basic principles of the asset-liability method.Learning ObjectivesFundamentals of Accounting for Income TaxesFuture taxable amounts and deferred taxesFuture deductible amounts and deferred taxesIncome statement presentationSpecific differencesRate considerationsAccounting for Net Operating LossesFinancial Statement PresentationReview of Asset-Liability MethodLoss carrybackLoss carryforwardLoss carryback exampleLoss carryforward exampleStatement of financial positionIncome statementTex reconciliationAccounting for Income TaxesCorporations must file income tax returns following the guidelines developed by the appropriate taxing authority, thus they:LO 1 Identify differences between pretax financial income and taxable income.Fundamentals of Accounting for Income Taxescalculate taxes payable based upon tax regulations, calculate income tax expense based upon IFRS.Amount reported as tax expense will often differ from the amount of taxes payable to the taxing authority.Tax CodeExchangesInvestors and CreditorsFinancial StatementsPretax Financial IncomeIFRSIncome Tax ExpenseTaxable IncomeIncome Tax PayableTax Returnvs.Fundamentals of Accounting for Income TaxesLO 1 Identify differences between pretax financial income and taxable income.Illustration 19-1Tax AuthorityIllustration: Chelsea, Inc. reported revenues of $130,000 and expenses of $60,000 in each of its first three years of operations. For tax purposes, Chelsea reported the same expenses to the tax authority in each of the years. Chelsea reported taxable revenues of $100,000 in 2011, $150,000 in 2012, and $140,000 in 2013. What is the effect on the accounts of reporting different amounts of revenue for IFRS versus tax?LO 1 Identify differences between pretax financial income and taxable income.Fundamentals of Accounting for Income TaxesRevenuesExpensesPretax financial incomeIncome tax expense (40%)$130,00060,000$70,000$28,000$130,000201260,000$70,000$28,000$130,000201360,000$70,000$28,000$390,000Total180,000$210,000$84,000IFRS ReportingRevenuesExpensesPretax financial incomeIncome tax payable (40%)$100,000201160,000$40,000$16,000$150,000201260,000$90,000$36,000$140,000201360,000$80,000$32,000$390,000Total180,000$210,000$84,000Tax Reporting2011LO 1 Identify differences between pretax financial income and taxable income.Book vs. Tax DifferenceIllustration 19-2Illustration 19-3Income tax expense (IFRS)Income tax payable (tax authority)Difference$28,00016,000$12,000$28,000201236,000$(8,000)$28,000201332,000$(4,000)$84,000Total84,000$0Comparison2011Are the differences accounted for in the financial statements?YearReporting Requirement201120122013Deferred tax liability account increased to $12,000Deferred tax liability account reduced by $8,000Deferred tax liability account reduced by $4,000YesLO 1 Identify differences between pretax financial income and taxable income.Book vs. Tax DifferenceIllustration 19-4Statement of Financial PositionAssets:Liabilities:Equity:Income tax expense 28,000Income StatementRevenues:Expenses:Net income (loss)20112011Deferred taxes 12,000Where does the “deferred tax liability” get reported in the financial statements?Income tax payable 16,000LO 1 Identify differences between pretax financial income and taxable income.Financial ReportingA Temporary Difference is the difference between the tax basis of an asset or liability and its reported (carrying or book) amount in the financial statements that will result in taxable amounts or deductible amounts in future years. Future Taxable AmountsFuture Deductible AmountsDeferred Tax Liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year.Deferred Tax Asset represents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences existing at the end of the current year.Illustration 19-22: Examples of Temporary DifferencesLO 2 Describe a temporary difference that results in future taxable amounts.Temporary DifferencesLO 2 Describe a temporary difference that results in future taxable amounts.Future Taxable Amounts and Deferred TaxesIllustration: In Chelsea’s situation, the only difference between the book basis and tax basis of the assets and liabilities relates to accounts receivable that arose from revenue recognized for book purposes. Chelsea reports accounts receivable at $30,000 in the December 31, 2011, IFRS-basis statement of financial position. However, the receivables have a zero tax basis.Illustration 19-5LO 2 Describe a temporary difference that results in future taxable amounts.Future Taxable Amounts and Deferred TaxesChelsea assumes that it will collect the accounts receivable and report the $30,000 collection as taxable revenues in future tax returns. Chelsea does this by recording a deferred tax liability.Illustration 19-6Illustration: Reversal of Temporary Difference, Chelsea Inc.LO 2 Describe a temporary difference that results in future taxable amounts.Future Taxable Amounts and Deferred TaxesRepresents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year.Deferred Tax LiabilityIncome tax expense (IFRS)Income tax payable (tax authority)Difference$28,00016,000$12,000$28,000201136,000$(8,000)$28,000201232,000$(4,000)$84,000Total84,000$02010Illustration 19-4LO 2 Describe a temporary difference that results in future taxable amounts.Future Taxable Amounts and Deferred TaxesIllustration: Because it is the first year of operations for Chelsea, there is no deferred tax liability at the beginning of the year. Chelsea computes the income tax expense for 2011 as follows:Deferred Tax LiabilityIllustration 19-9LO 2 Describe a temporary difference that results in future taxable amounts.Future Taxable Amounts and Deferred TaxesIllustration: Chelsea makes the following entry at the end of 2011 to record income taxes.Deferred Tax LiabilityIncome Tax Expense 28,000 Income Tax Payable 16,000 Deferred Tax Liability 12,000LO 2 Describe a temporary difference that results in future taxable amounts.Future Taxable Amounts and Deferred TaxesIllustration: Computation of Income Tax Expense for 2012.Deferred Tax LiabilityIllustration 19-10LO 2 Describe a temporary difference that results in future taxable amounts.Future Taxable Amounts and Deferred TaxesIllustration: Chelsea makes the following entry at the end of 2012 to record income taxes.Deferred Tax LiabilityIncome Tax Expense 28,000Deferred Tax Liability 8,000 Income Tax Payable 36,000Illustration 19-11E19-1: Starfleet Corporation has one temporary difference at the end of 2010 that will reverse and cause taxable amounts of $55,000 in 2011, $60,000 in 2012, and $75,000 in 2013. Starfleet’s pretax financial income for 2010 is $400,000, and the tax rate is 30% for all years. There are no deferred taxes at the beginning of 2010.InstructionsCompute taxable income and income taxes payable for 2010.Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2010.LO 2 Describe a temporary difference that results in future taxable amounts.Future Taxable Amounts and Deferred TaxesLO 2 Describe a temporary difference that results in future taxable amounts.a.a.Future Taxable Amounts and Deferred TaxesFuture Deductible Amounts and Deferred TaxesIllustration: During 2011, Cunningham Inc. estimated its warranty costs related to the sale of microwave ovens to be $500,000, paid evenly over the next two years. For book purposes, in 2011 Cunningham reported warranty expense and a related estimated liability for warranties of $500,000 in its financial statements. For tax purposes, the warranty tax deduction is not allowed until paid. Illustration 19-12LO 3 Describe a temporary difference that results in future deductible amounts.When Cunningham pays the warranty liability, it reports an expense for tax purposes. Cunningham reports this future tax benefit in the December 31, 2010, statement of financial position as a deferred tax asset.Illustration 19-13Illustration: Reversal of Temporary Difference, Cunningham Inc.LO 3 Describe a temporary difference that results in future deductible amounts.Future Deductible Amounts and Deferred TaxesRepresents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences existing at the end of the current year.Deferred Tax AssetLO 3 Describe a temporary difference that results in future deductible amounts.Future Deductible Amounts and Deferred TaxesIllustration: Hunt Co. accrues a loss and a related liability of $50,000 in 2011 for financial reporting purposes because of pending litigation. Hunt cannot deduct this amount for tax purposes until the period it pays the liability, expected in 2012. Deferred Tax AssetLO 3 Describe a temporary difference that results in future deductible amounts.Illustration 19-14Future Deductible Amounts and Deferred TaxesIllustration: Assuming that 2011 is Hunt’s first year of operations, and income tax payable is $100,000, Hunt computes its income tax expense as follows.Deferred Tax AssetLO 3 Describe a temporary difference that results in future deductible amounts.Illustration 19-16Future Deductible Amounts and Deferred TaxesIllustration: Hunt makes the following entry at the end of 2011 to record income taxes.Deferred Tax AssetIncome Tax Expense 80,000Deferred Tax Asset 20,000 Income Tax Payable 100,000Future Deductible Amounts and Deferred TaxesLO 3 Describe a temporary difference that results in future deductible amounts.Illustration: Computation of Income Tax Expense for 2012.Deferred Tax AssetIllustration 19-17Future Deductible Amounts and Deferred TaxesLO 3 Describe a temporary difference that results in future deductible amounts.Illustration: Hunt makes the following entry at the end of 2012 to record income taxes.Deferred Tax AssetIncome Tax Expense 160,000 Deferred Tax Asset 20,000 Income Tax Payable 140,000Future Deductible Amounts and Deferred TaxesLO 3 Describe a temporary difference that results in future deductible amounts.Illustration 19-18Illustration: Columbia Corporation has one temporary difference at the end of 2010 that will reverse and cause deductible amounts of $50,000 in 2011, $65,000 in 2012, and $40,000 in 2013. Columbia’s pretax financial income for 2010 is $200,000 and the tax rate is 34% for all years. There are no deferred taxes at the beginning of 2010. Columbia expects to be profitable in the future. InstructionsCompute taxable income and income taxes payable for 2010.Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2010.LO 3 Describe a temporary difference that results in future deductible amounts.Future Deductible Amounts and Deferred TaxesLO 3 Describe a temporary difference that results in future deductible amounts.a.a.Future Deductible Amounts and Deferred TaxesDeferred Tax Asset (Non-Recognition)A company should reduce a deferred tax asset if it is probable that it will not realize some portion or all of the deferred tax asset. “Probable” means a level of likelihood of at least slightly more than 50 percent.LO 4 Explain the non-recognition of a deferred tax asset.Future Deductible Amounts and Deferred TaxesE19-14: Callaway Corp. has a deferred tax asset balance of $150,000 at the end of 2010 due to a single cumulative temporary difference of $375,000. At the end of 2011 this same temporary difference has increased to a cumulative amount of $500,000. Taxable income for 2011 is $850,000. The tax rate is 40% for all years. No valuation account is in existence at the end of 2010.InstructionsAssuming that it is probable that $30,000 of the deferred tax asset will not be realized, prepare the journal entries required for 2011.Future Deductible Amounts and Deferred TaxesLO 4 Explain the non-recognition of a deferred tax asset.Future Deductible Amounts and Deferred TaxesLO 4 Explain the non-recognition of a deferred tax asset.Income tax payable or refundableLO 5 Describe the presentation of income tax expense in the income statement.Income Statement PresentationChange in deferred income taxIncome tax expense or benefit+-=In the income statement or in the notes to the financial statements, a company should disclose the significant components of income tax expense attributable to continuing operations.Formula to Compute Income Tax ExpenseIllustration 19-20LO 5 Describe the presentation of income tax expense in the income statement.Income Statement PresentationGiven the previous information related to Chelsea Inc., Chelsea reports its income statement as follows.Illustration 19-21Taxable temporary differences - Deferred tax liabilityDeductible temporary differences - Deferred tax AssetTemporary DifferencesSpecific DifferencesText Illustration 19-22: Examples of Temporary DifferencesLO 6 Describe various temporary and permanent differences.Enter into pretax financial income but never into taxable income or Enter into taxable income but never into pretax financial income.Affect only the period in which they occur. Do not give rise to future taxable or deductible amounts.Text Illustration 19-24: Examples of Permanent DifferencesSpecific DifferencesLO 6 Describe various temporary and permanent differences.Permanent DifferencesDo the following generate: Future Deductible Amount = Deferred Tax AssetFuture Taxable Amount = Deferred Tax LiabilityPermanent Difference1. An accelerated depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes.Future Taxable Amount2. A landlord collects some rents in advance. Rents received are taxable in the period when they are received.Future Deductible Amount3. Expenses are incurred in obtaining tax-exempt income.Permanent Difference4. Costs of guarantees and warranties are estimated and accrued for financial reporting purposes.Future Deductible AmountSpecific DifferencesLO 6 Describe various temporary and permanent differences.E19-65. Sales of investments are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes.Future Taxable Amount6. Interest is received on an investment in tax-exempt governmental obligations.Future Deductible Amount7. Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled. Permanent DifferenceSpecific DifferencesLO 6 Describe various temporary and permanent differences.E19-6Do the following generate: Future Deductible Amount = Deferred Tax AssetFuture Taxable Amount = Deferred Tax LiabilityPermanent DifferencePermanent DifferencesLO 6 Describe various temporary and permanent differences.E19-4: Havaci Company reports pretax financial income of €80,000 for 2010. The following items cause taxable income to be different than pretax financial income.Depreciation on the tax return is greater than depreciation on the income statement by €16,000.Rent collected on the tax return is greater than rent earned on the income statement by €27,000.Fines for pollution appear as an expense of €11,000 on the income statement.Havaci’s tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2010.Permanent DifferencesLO 6 Describe various temporary and permanent differences.A company must consider presently enacted changes in the tax rate that become effective for a particular future year(s) when determining the tax rate to apply to existing temporary differences.Revision of Future Tax RatesWhen a change in the tax rate is enacted, companies should record its effect on the existing deferred income tax accounts immediately. Future tax RatesTax Rate ConsiderationsLO 7 Explain the effect of various tax rates and tax rate changes on deferred income taxes.Net operating loss (NOL) = tax-deductible expenses exceed taxable revenues.Tax laws permit taxpayers to use the losses of one year to offset the profits of other years (carryback and carryforward). Accounting for Net Operating LossesLO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Loss CarrybackAccounting for Net Operating LossesBack 2 years and forward 20 years.Losses must be applied to earliest year first.Illustration 19-29LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Loss CarryforwardMay elect to forgo loss carryback andCarryforward losses 20 years.Accounting for Net Operating LossesLO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Illustration 19-30BE19-12: Conlin Corporation had the following tax information.Accounting for Net Operating LossesIn 2011 Conlin suffered a net operating loss of $480,000, which it elected to carry back. The 2011 enacted tax rate is 29%. Prepare Conlin’s entry to record the effect of the loss carryback.LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Accounting for Net Operating Losses$144,000LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.E19-12: Journal Entry for 2011Accounting for Net Operating LossesIncome tax refund receivable 144,000 Benefit due to loss carryback 144,000LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Accounting for Net Operating LossesBE19-13: Rode Inc. incurred a net operating loss of €500,000 in 2010. Combined income for 2008 and 2009 was €350,000. The tax rate for all years is 40%. Rode elects the carryback option. Prepare the journal entries to record the benefits of the loss carryback and the loss carryforward.LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Accounting for Net Operating LossesLO 8 Apply accounting procedures for a loss carryback and a loss carryforward.E19-13: Journal Entries for 2010Accounting for Net Operating LossesIncome tax refund receivable 140,000 Benefit due to loss carryback 140,000Deferred tax asset 60,000 Benefit due to loss carryforward 60,000LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Accounting for Net Operating LossesLO 8 Apply accounting procedures for a loss carryback and a loss carryforward.BE19-14: Use the information for Rode Inc. given in BE19-13. Assume that it is more likely than not that the entire net operating loss carryforward will not be realized in future years. Prepare all the journal entries necessary at the end of 2010.E19-14: Journal Entries for 2010Accounting for Net Operating LossesLO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Whether the company will realize a deferred tax asset depends on whether sufficient taxable income exists or will exist within the carryforward period.Valuation Allowance RevisitedText Illustration 19-37: Possible Sources of Taxable IncomeTo the extent that it is not probable that taxable profit will be available against which the unused tax losses or unused tax credits can be utilized, the deferred tax asset is not recognized.LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Statement of Financial PositionFinancial Statement PresentationThe net deferred tax asset or net deferred tax liability is reported in the non-current section of the statement of financial position.LO 9Illustration 19-38Income StatementFinancial Statement PresentationLO 9 Describe the presentation of income taxes in financial statements.Companies allocate income tax expense (or benefit) to continuing operations, discontinued operations, other comprehensive income, and prior period adjustments. Income StatementComponents of income tax expense (benefit) may include:Current tax expense (benefit).Any adjustments recognized in the period for current tax of prior periods.Amount of deferred tax expense (benefit) relating to the origination and reversal of temporary differences.Amount of deferred tax expense (benefit) relating to changes in tax rates or the imposition of new taxes.Amount of the benefit arising from a previously unrecognized tax loss, tax credit, or temporary difference of a prior period that is used to reduce current and deferred tax expense.LO 9Tax ReconciliationFinancial Statement PresentationLO 9 Describe the presentation of income taxes in financial statements.Companies either provide:A numerical reconciliation between tax expense (benefit) and the product of accounting profit multiplied by the applicable tax rate(s), disclosing also the basis on which the applicable tax rate(s) is (are) computed; orA numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing also the basis on which the applicable tax rate is computed.Review of the Asset-Liability MethodCompanies apply the following basic principles: LO 10 Indicate the basic principles of the asset-liability method.Illustration 19-42Review of the Asset-Liability MethodLO 10 Indicate the basic principles of the asset-liability method.Illustration 19-43Procedures for Computingand Reporting DeferredIncome TaxesU.S. GAAP classifies deferred taxes based on the classification of the asset or liability to which it relates. The classification of deferred taxes under IFRS is always non-current.U.S. GAAP uses an impairment approach for deferred tax assets. In this approach, the deferred tax asset is recognized in full. It is then reduced by a valuation account if it is more likely than not that all or a portion of the deferred tax asset will not be realized. Under IFRS, an affirmative judgment approach is used, by which a deferred tax asset is recognized up to the amount that is probable to be realized.For U.S. GAAP, the enacted tax rate must be used. IFRS uses the enacted tax rate or substantially enacted tax rate. (“Substantially enacted” means virtually certain.) The tax effects related to certain items are reported in equity under IFRS. That is not the case under U.S. GAAP, which charges or credits the tax effects to income. U.S. GAAP requires companies to assess the likelihood of uncertain tax positions being sustainable upon audit. Potential liabilities must be accrued and disclosed if the position is “more likely than not” to be disallowed. Under IFRS, all potential liabilities must be recognized. With respect to measurement, IFRS uses an expected-value approach to measure the tax liability, which differs from U.S. GAAP.Fiscal Year-2010Allman Company, which began operations at the beginning of 2010, produces various products on a contract basis. Each contract generates a gross profit of $80,000. Some of Allman’s contracts provide for the customer to pay on an installment basis. Under these contracts, Allman collects one-fifth of the contract revenue in each of the following four years. For financial reporting purposes, the company recognizes gross profit in the year of completion (accrual basis); for tax purposes, Allman recognizes gross profit in the year cash is collected (installment basis). LO 11 Understand and apply the concepts and procedures of interperiod tax allocation.Fiscal Year-2010Presented below is information related to Allman’s operations for 2010.In 2010, the company completed seven contracts that allow for the customer to pay on an installment basis. Allman recognized the related gross profit of $560,000 for financial reporting purposes. It reported only $112,000 of gross profit on installment sales on the 2010 tax return. The company expects future collections on the related installment receivables to result in taxable amounts of $112,000 in each of the next four years.At the beginning of 2010, Allman Company purchased depreciable assets with a cost of $540,000. For financial reporting purposes, Allman depreciates these assets using the straight-line method over a six-year service life. The following is the depreciation schedule for both financial and tax purposes.LO 11Fiscal Year-2010LO 11The company warrants its product for two years from the date of completion of a contract. During 2010, the product warranty liability accrued for financial reporting purposes was $200,000, and the amount paid for the satisfaction of warranty liability was $44,000. Allman expects to settle the remaining $156,000 by expenditures of $56,000 in 2011 and $100,000 in 2012.Fiscal Year-2010LO 11In 2010 nontaxable municipal bond interest revenue was $28,000.During 2010 nondeductible fines and penalties of $26,000 were paid.Pretax financial income for 2010 amounts to $412,000.Tax rates enacted before the end of 2010 were:2010 50%2011 and later years 40%The accounting period is the calendar year.The company is expected to have taxable income in all future years.Taxable Income and Income Tax Payable-2010LO 11The first step is to determine Allman Company’s income tax payable for 2010 by calculating its taxable income.Illustration 19A-1Illustration 19A-2Deferred Income Taxes – End of 2010LO 11Illustration 19A-3Illustration 19A-4Deferred Tax Expense (Benefit) and the Journal Entry to Record Income Taxes - 2010LO 11Illustration 19A-5Computation of Deferred Tax Expense (Benefit), 2010Computation of Net Deferred Tax Expense, 2010Illustration 19A-6Deferred Tax Expense (Benefit) and the Journal Entry to Record Income Taxes - 2010LO 11Illustration 19A-7Computation of Total Income Tax Expense, 2010Journal Entry for Income Tax Expense, 2010Income Tax Expense 174,000Deferred Tax Asset 62,400 Income Tax Payable 50,000 Deferred Tax Liability 186,400Companies should classify deferred tax assets and liabilities as current and noncurrent on the balance sheet based on the classifications of related assets and liabilities.Financial Statement Presentation - 2010LO 11Illustration 19A-8Statement of Financial Position 2010Financial Statement Presentation - 2010LO 11Illustration 19A-9Illustration 19A-10Income Statement 2010Copyright © 2011 John Wiley & Sons, Inc. 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