Kế toán tài chính 2 - Chapter 15: Accounting for income taxes

CHAPTER 15ACCOUNTING FOR INCOME TAXESINTERMEDIATE ACCOUNTINGPrinciples and Analysis 2nd EditionWarfield Weygandt Kieso Identify 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 purpose of a deferred tax asset valuation allowance.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 deferred 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 exampleBalance sheetIncome statementBasic principlesReporting deferred taxesAccounting for Income TaxesCorporations must file income tax returns following the guidelines developed by the Internal Revenue Service (IRS), thus they:LO 1 Identify differences between pretax financial income and taxable income.Fundamentals of Accounting for Income Taxescalculate taxes payable based upon IRS code, calculate income tax expense based upon GAAP.Amount reported as tax expense will often differ from the amount of taxes payable to the IRS.Tax CodeExchangesInvestors and CreditorsFinancial StatementsPretax Financial IncomeGAAPIncome Tax ExpenseTaxable IncomeIncome Tax PayableTax Returnvs.IRSFundamentals of Accounting for Income TaxesLO 1 Identify differences between pretax financial income and taxable income.Illustration: Assume the company reports revenue in 2007, 2008, and 2009 of $130,000, respectively. The revenue is reported the same for both GAAP and tax purposes. For simplification, assume the company reports one expense, depreciation, over the three years applying the straight-line method for financial reporting purposes (GAAP) and MACRS (IRS) for the tax return. What is the effect on the accounts of using the two different depreciation methods?LO 1 Identify differences between pretax financial income and taxable income.Fundamentals of Accounting for Income TaxesRevenuesExpenses (S/L depreciation)Pretax financial incomeIncome tax expense (40%)$130,00030,000$100,000$40,000$130,000200830,000$100,000$40,000$130,000200930,000$100,000$40,000$390,000Total90,000$300,000$120,000GAAP ReportingRevenuesExpenses (MACRS depreciation)Pretax financial incomeIncome tax payable (40%)$130,000200740,000$90,000$36,000$130,000200830,000$100,000$40,000$130,000200920,000$110,000$44,000$390,000Total90,000$300,000$120,000Tax Reporting2007LO 1 Identify differences between pretax financial income and taxable income.Book vs. Tax DifferenceIncome tax expense (GAAP)Income tax payable (IRS)Difference$40,00036,000$4,000$40,000200840,000$0$40,000200944,000$(4,000)$120,000Total120,000$0Comparison2007Are the differences accounted for in the financial statements?YearReporting Requirement200720082009Deferred tax liability account increased to $4,000No change in deferred tax liability accountDeferred tax liability account reduced by $4,000YesLO 1 Identify differences between pretax financial income and taxable income.Book vs. Tax DifferenceBalance SheetAssets:Liabilities:Equity:Income tax expense 40,000Income StatementRevenues:Expenses:Net income (loss)20072007Deferred taxes 4,000Where does the “deferred tax liability” get reported in the financial statements?Income tax payable 36,000LO 1 Identify differences between pretax financial income and taxable income.Financial Reporting for 2007A 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 15-22 Examples of Temporary DifferencesLO 2 Describe a temporary difference that results in future taxable amounts.Temporary DifferencesExercise: South Carolina Corporation has one temporary difference at the end of 2007 that will reverse and cause taxable amounts of $55,000 in 2008, $60,000 in 2009, and $65,000 in 2010. South Carolina’s pretax financial income for 2007 is $300,000, and the tax rate is 30% for all years. There are no deferred taxes at the beginning of 2007.Instructions:Compute taxable income and income taxes payable for 2007.Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2007.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.Future Taxable Amounts and Deferred Taxesa.a.Illustration: Columbia Corporation has one temporary difference at the end of 2007 that will reverse and cause deductible amounts of $50,000 in 2008, $65,000 in 2009, and $40,000 in 2010. Columbia’s pretax financial income for 2007 is $200,000 and the tax rate is 34% for all years. There are no deferred taxes at the beginning of 2007. Columbia expects to be profitable in the future. Instructions:Compute taxable income and income taxes payable for 2007.Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2007.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.Future Deductible Amounts and Deferred Taxesa.a.Deferred Tax Asset—Valuation AllowanceA company should reduce a deferred tax asset 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. “More likely than not” means a level of likelihood of at least slightly more than 50 percent.LO 4 Explain the purpose of a deferred tax asset valuation allowance.Future Deductible Amounts and Deferred TaxesExercise: Jennifer Capriati Corp. has a deferred tax asset balance of $150,000 at the end of 2006 due to a single cumulative temporary difference of $375,000. At the end of 2007 this same temporary difference has increased to a cumulative amount of $450,000. Taxable income for 2007 is $820,000. The tax rate is 40% for all years. No valuation account is in existence at the end of 2006.Instructions:Assuming that it is more likely than not that $30,000 of the deferred tax asset will not be realized, prepare the journal entries required for 2007.Future Deductible Amounts and Deferred TaxesLO 4 Explain the purpose of a deferred tax asset valuation allowance.Future Deductible Amounts and Deferred TaxesLO 4 Explain the purpose of a deferred tax asset valuation allowance.Deferred Tax Asset—Valuation AllowanceExercise: Balance Sheet PresentationLO 4 Explain the purpose of a deferred tax asset valuation allowance.Future Deductible Amounts and Deferred TaxesIncome 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+-=Illustration 15-20In the income statement or in the notes to the financial statements, a company should disclose the significant components of income tax expense (current and deferred).Formula to Compute Income Tax ExpenseTaxable temporary differences - Deferred tax liabilityDeductible temporary differences - Deferred tax AssetTemporary DifferencesSpecific DifferencesText Illustration 15-22 Examples of Temporary DifferencesLO 6 Describe various temporary and permanent differences.Permanent differences are caused by 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.Permanent differences affect only the period in which they occur, they do not give rise to future taxable or deductible amounts. There are no deferred tax consequences to be recognized.Text Illustration 15-24 Examples of Permanent DifferencesSpecific DifferencesLO 6 Describe various temporary and permanent differences.Do the following generate: Future deductible amount = Deferred tax assetFuture taxable amount = Deferred tax liabilityA permanent difference1. The MACRS 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.Do the following generate: Future deductible amount = Deferred tax assetFuture taxable amount = Deferred tax liabilityA permanent difference5. Sales of investments are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes.Future Taxable Amount6. Proceeds are received from a life insurance company because of the death of a key officer (the company carries a policy on key officers).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..A Permanent DifferenceSpecific DifferencesLO 6 Describe various temporary and permanent differences.Exercise: Zurich Company reports pretax financial income of $70,000 for 2007. The following items cause taxable income to be different than pretax financial income. (1) Depreciation on the tax return is greater than depreciation on the income statement by $16,000. (2) Rent collected on the tax return is greater than rent earned on the income statement by $22,000. (3) Fines for pollution appear as an expense of $11,000 on the income statement.Zurich’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 2007.Instructions: Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2007.Permanent DifferencesLO 6 Describe various temporary and permanent differences.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. Tax Rate ConsiderationsSpecific DifferencesLO 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.The federal 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 LossesLO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Back 2 years and forward 20 yearsLosses must be applied to earliest year firstLoss CarryforwardMay elect to forgo loss carryback andCarryforward losses 20 yearsExercise: (Carryback) Valis Corporation had the following tax information.Accounting for Net Operating LossesLO 8 Apply accounting procedures for a loss carryback and a loss carryforward.In 2007 Valis suffered a net operating loss of $450,000, which it elected to carry back. The 2007 enacted tax rate is 29%. Prepare Valis’s entry to record the effect of the loss carryback.Accounting for Net Operating Losses$135,000LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Exercise: Journal Entry for 2007Accounting for Net Operating LossesLO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Brief Exercise: (Carryback and Carryforward) Zoop Inc. incurred a net operating loss of $500,000 in 2007. Combined income for 2005 and 2006 was $400,000. The tax rate for all years is 40%. Zoop elects the carryback option. Prepare the journal entries to record the benefits of the loss carryback and the loss carryforward.Accounting for Net Operating LossesLO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Accounting for Net Operating Losses$160,000LO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Deferred Tax AssetBrief Exercise: Journal Entries for 2007Accounting for Net Operating LossesLO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Exercise: (Carryback and Carryforward with Valuation Allowance) Use the information for Zoop Inc. given in Brief Exercise. 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 2007.Accounting for Net Operating LossesLO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Exercise: Journal Entries for 2007Accounting 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 RevisitedLO 8 Apply accounting procedures for a loss carryback and a loss carryforward.Text Illustration 15-37 Possible Sources of Taxable IncomeIf any one of these sources is sufficient to support a conclusion that a valuation allowance is unnecessary, a company need not consider other sources.Text Illustration 15-38 Evidence to Consider in Evaluating the Need for a Valuation AccountBalance Sheet PresentationFinancial Statement PresentationLO 9 Describe the presentation of deferred income taxes in financial statements.An individual deferred tax liability or asset is classified as current or noncurrent based on the classification of the related asset or liability for financial reporting purposes.Companies should classify deferred tax accounts on the balance sheet in two categories: one for the net current amount, and one for the net noncurrent amount.Income Statement PresentationFinancial Statement PresentationLO 9 Describe the presentation of deferred income taxes in financial statements.Companies should allocate income tax expense (or benefit) to continuing operations, discontinued operations, extraordinary items, and prior period adjustments. Companies should disclose the significant components of income tax expense attributable to continuing operations (current tax expense, deferred tax expense, etc.). Review of the Asset-Liability MethodCompanies apply the following basic principles: Recognize a current tax liability or asset for the estimated taxes payable or refundable. Recognize a deferred tax liability or asset for the estimated future tax effects attributable to temporary differences and carryforwards using enacted tax rate. Base the measurement of current and deferred taxes on provisions of the enacted tax law. Reduce the measurement of deferred tax assets, if necessary, by the amount of any tax benefits that, companies do not expect to realize.LO 10 Indicate the basic principles of the asset-liability method.Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. 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