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After completing this chapter you should be able to 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...and other contents.
Chapter 19-1 CHAPTER 19 ACCOUNTING FOR INCOME TAXES Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 19-2 Learning Learning Objectives Objectives 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 10 Indicate the basic principles of the asset-liability method Chapter 19-3 Accounting Accounting for for Income Income Taxes Taxes Fundamentals of Accounting for Income Taxes Future taxable amounts and deferred taxes Future deductible amounts and deferred taxes Income statement presentation Specific differences Rate considerations Chapter 19-4 Accounting for Net Operating Losses Financial Statement Presentation Loss carryback Loss carryforward Loss carryback example Loss carryforward example Balance sheet Income statement Uncertain tax positions Review of AssetLiability Method Fundamentals Fundamentals of of Accounting Accounting for for Income Income Taxes Taxes Corporations must file income tax returns following the guidelines developed by the Internal Revenue Service (IRS), thus they: calculate 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 Chapter 19-5 LO Identify differences between pretax financial income and taxable income Fundamentals Fundamentals of of Accounting Accounting for for Income Income Taxes Taxes Financial Statements Tax Return Illustration 19-1 vs Exchanges Investors and Creditors Pretax Financial Income GAAP Income Tax Expense Chapter 19-6 ≠ Taxable Income ≠ Tax Code Income Tax Payable LO Identify differences between pretax financial income and taxable income Fundamentals Fundamentals of of Accounting Accounting for for Income Income Taxes Taxes Illustration: KRC, Inc reported revenues of $130,000 and expenses of $60,000 in each of its first three years of operations For tax purposes, KRC reported the same expenses to the IRS in each of the years KRC reported taxable revenues of $100,000 in 2010, $150,000 in 2011, and $140,000 in 2012 What is the effect on the accounts of reporting different amounts of revenue for GAAP versus tax? Chapter 19-7 LO Identify differences between pretax financial income and taxable income Book Book vs vs Tax Tax Difference Difference GAAP GAAPReporting Reporting Illustration 19-2 2010 2011 2012 Total Revenues $130,000 $130,000 $130,000 $390,000 Expenses 60,000 60,000 60,000 180,000 Pretax financial income $70,000 $70,000 $70,000 $210,000 Income tax expense (40%) $28,000 $28,000 $28,000 $84,000 Illustration 19-3 Tax TaxReporting Reporting 2010 2011 2012 Total Revenues $100,000 $150,000 $140,000 $390,000 Expenses 60,000 60,000 60,000 180,000 Pretax financial income $40,000 $90,000 $80,000 $210,000 Income tax payable (40%) $16,000 $36,000 $32,000 $84,000 Chapter 19-8 LO Identify differences between pretax financial income and taxable income Book Book vs vs Tax Tax Difference Difference Illustration 19-4 Comparison Comparison Income tax expense (GAAP) Income tax payable (IRS) Difference 2010 2011 2012 Total $28,000 $28,000 $28,000 $84,000 16,000 36,000 32,000 84,000 $(8,000) $(4,000) $12,000 Are the differences accounted for in the financial statements? Year Reporting Requirement 2010 Deferred tax liability account increased to $12,000 2011 Deferred tax liability account reduced by $8,000 2012 Deferred tax liability account reduced by $4,000 Chapter 19-9 $0 Yes LO Identify differences between pretax financial income and taxable income Financial Financial Reporting Reporting for for 2010 2010 Balance Sheet Assets: Income Statement 2010 Revenues: 2010 Expenses: Liabilities: Deferred taxes 12,000 tax payable Income 16,000 Equity: Income tax expense 28,000 Net income (loss) Where does the “deferred tax liability” get reported in the financial statements? Chapter 19-10 LO Identify differences between pretax financial income and taxable income Review Review of of the the Asset-Liability Asset-Liability Method Method Companies apply the following basic principles: (1) Recognize a current tax liability or asset for the estimated taxes payable or refundable (2) Recognize a deferred tax liability or asset for the estimated future tax effects attributable to temporary differences and carryforwards using enacted tax rate (3) Base the measurement of current and deferred taxes on provisions of the enacted tax law (4) Reduce the measurement of deferred tax assets, if necessary, by the amount of any tax benefits that, companies not expect to realize Chapter 19-60 LO 10 Indicate the basic principles of the asset-liability method Review Review of of the the Asset-Liability Asset-Liability Method Method Illustration 19-43 Procedures for Computing and Reporting Deferred Income Taxes Chapter 19-61 LO 10 Indicate the basic principles of the asset-liability method Chapter 19-62 The classification of deferred taxes under iGAAP is always noncurrent Under iGAAP, an affirmative judgment approach is used, by which a deferred tax asset is recognized up to the amount that is probable to be realized U.S GAAP uses an impairment approach iGAAP uses the enacted tax rate or substantially enacted tax rate (“Substantially enacted” means virtually certain.) For U.S GAAP, the enacted tax rate must be used Chapter 19-63 The tax effects related to certain items are reported in equity under iGAAP 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 iGAAP, all potential liabilities must be recognized With respect to measurement, iGAAP uses an expected-value approach to measure the tax liability, which differs from U.S GAAP Fiscal Year-2009 Allman Company, which began operations at the beginning of 2009, 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) Chapter 19-64 LO 11 Understand and apply the concepts and procedures of interperiod tax allocation Fiscal Year-2009 Presented below is information related to Allman’s operations for 2009 Chapter 19-65 In 2009, 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 2009 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 2009, 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 For tax purposes, the assets fall in the fiveyear recovery class, and Allman uses the MACRS system LO 11 Fiscal Year-2009 Chapter 19-66 The company warrants its product for two years from the date of completion of a contract During 2009, 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 2010 and $100,000 in 2011 LO 11 Fiscal Year-2009 In 2009 nontaxable municipal bond interest revenue was $28,000 During 2009 nondeductible fines and penalties of $26,000 were paid Pretax financial income for 2009 amounts to $412,000 Tax rates enacted before the end of 2009 were: 2009 50% 2010 and later years 40% The accounting period is the calendar year The company is expected to have taxable income in all future years Chapter 19-67 LO 11 Taxable Income and Income Tax Payable-2009 The first step is to determine Allman Company’s income tax payable for 2009 by calculating its taxable income Illustration 19A-1 Illustration 19A-2 Chapter 19-68 LO 11 Computing Deferred Income Taxes – End of 2009 Illustration 19A-3 Illustration 19A-4 Chapter 19-69 LO 11 Deferred Tax Expense (Benefit) and the Journal Entry to Record Income Taxes - 2009 Computation of Deferred Tax Expense (Benefit), 2009 Illustration 19A-5 Computation of Net Deferred Tax Expense, 2009 Chapter 19-70 Illustration 19A-6 LO 11 Deferred Tax Expense (Benefit) and the Journal Entry to Record Income Taxes - 2009 Computation of Total Income Tax Expense, 2009 Illustration 19A-7 Journal Entry for Income Tax Expense, 2009 Chapter 19-71 Income Tax Expense Deferred Tax Asset Income Tax Payable 50,000 Deferred Tax Liability 174,000 62,400 LO 11 Financial Statement Presentation - 2009 Companies should classify deferred tax assets and liabilities as current and noncurrent on the balance sheet based on the classifications of related assets and liabilities Illustration 19A-8 Chapter 19-72 LO 11 Financial Statement Presentation - 2009 Balance Sheet Presentation of Deferred Taxes, 2009 Illustration 19A-9 Illustration 19A-10 Chapter 19-73 LO 11 Copyright Copyright Copyright © 2009 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Chapter 19-74 .. .CHAPTER 19 ACCOUNTING FOR INCOME TAXES Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 1 9- 2 Learning Learning Objectives Objectives... Illustration 1 9- 11 Chapter 1 9- 19 LO Describe a temporary difference that results in future taxable amounts Future Future Taxable Taxable Amounts Amounts and and Deferred Deferred Taxes Taxes E1 9-1 : Starfleet... receivable at $30,000 in the December 31, 2010, GAAP-basis balance sheet However, the receivables have a zero tax basis Illustration 1 9- 5 Chapter 1 9- 12 LO Describe a temporary difference that results