Intermediate accounting 17e stice skousen cengage chapter 16

Stice | Stice | Skousen Intermediate Accounting,17E Income Taxes PowerPoint presented by: Douglas Cloud Professor Emeritus of Accounting, Pepperdine University 16-1 © 2010 Cengage Learning Deferred Income Tax Overview • The primary goal of financial accounting is to provide useful information to management, stockholders, creditors, and others properly interested • The primary goal of the income tax system is the equitable collection of revenue 16-2 Deferred Income Tax Overview Two basic considerations in U.S corporations’ computed net income: How to account for revenues and expenses that have already been recognized and reported to shareholders in a company’s financial statements but will not affect taxable income until subsequent years (continues) 16-3 Deferred Income Tax Overview How to account for revenues and expenses that have already been reported to the IRS but will not be recognized in the financial statements until subsequent years 16-4 Example 1: Simple Deferred Tax Liability In 2011, Ibanez Company earned revenues of $30,000 Ibanez has no expenses other than income taxes In this case, Ibanez is taxed on cash received The company received $10,000 in 2011 and $20,000 in 2012 The income tax rate is 40% and it is expected to remain the same into the foreseeable future (continues) 16-5 Example 1: Simple Deferred Tax Liability Income Tax Expense Income Taxes Payable 4,000 Deferred Tax Liability 8,000 $4,000 current year + $8,000 deferred (continues) 12,000 $30,000 × 40 $10,000 × 40 $20,000 × 40 16-6 Example 1: Simple Deferred Tax Liability Ibanez Company Income Statement For the Year Ended December 31, 2011 Revenues $30,000 Income tax expense: Current Deferred 12,000 Net income $18,000 $4,000 8,000 16-7 Example 2: Simple Deferred Tax Liability In 2011, Gupta Company generated service revenues totaling $60,000, all taxable in 2011 No warranty claims were made in 2011, but Gupta estimates that in 2012 warranty costs of $10,000 will be incurred for claims related to 2011 service revenues Assume a 40% tax rate (continues) 16-8 Example 2: Simple Deferred Tax Liability Income Tax Expense Deferred Tax Asset Income Taxes Payable 24,000 $24,000 current year – $4,000 deferred 20,000 4,000 $50,000 × 40 $10,000 × 40 $60,000 × 40 (continues) 16-9 Example 2: Simple Deferred Tax Liability Gupta Company Income Statement For the Year Ended December 31, 2011 Revenues $60,000 Warranty expense 10,000 Income before taxes $50,000 Income tax expense: Current Deferred benefit 20,000 Net income $24,000 (4,000) 16-10 Accounting for Uncertain Tax Positions If Company A determines that the technical merits of its position exceed the more-than-not threshold (cumulative probability becomes greater than 50%), the amount of tax benefit to be recognize for financial statement purposes is $60 (continues) 16-43 Accounting for Uncertain Tax Positions The required journal entry is as follows: Income Tax Expense Unrecognized Tax Benefit 40 40 Current liability if payment is anticipated within one year of the current operating cycle 16-44 Accounting for Uncertain Tax Positions Case Case 3: 3: Uncertain Uncertain Tax Tax Position— Position— NOT NOT More More Likely Likely Than Than Not Not If the company determines that it is not more likely than not that the tax position will be sustained, then the entire amount of the position must be recognized as a liability Income Tax Expense Unrecognized Tax Benefit 100 100 16-45 Carryback and Carryforward of Operating Losses Net operating loss carryback is applied to the preceding two years in reverse order Carryback Election Year –2 Loss Year Net operating loss carryforward Carryforward Election is applied to income over the next 20 years Year +20 16-46 Net Operating Loss (NOL) Carryback Prairie Company had the following pattern of income and losses for 2010 through 2012: Journal Entry in 2012: Income Tax Refund Receivable Income Tax Benefit from NOL Carryback 6,200 [$3,500 + (30% × $9,000)] 6,200 16-47 Net Operating Loss (NOL) Carryforward Continuing with the Prairie Company illustration from Slide 1647, assume that in 2013 the firm incurred an operating loss of $35,000 Income Income (Loss) Year Tax Rate Tax 2012 $(19,000) 30% $0 2013 (35,000) 30% The only loss remaining against which operating income can be applied is $5,000 from 2011 This leaves $30,000 to be carried forward from 2013 as a future tax benefit of $9,000 ($30,000 × 30) (continues) 16-48 Accounting for NOL Carryforward The journal entry for 2013 to record the tax benefits: Income Tax Refund Receivable Deferred Tax Asset—NOL Carryforward Income Tax Benefit from NOL Carryback 1,500 Income Tax Benefit from NOL Carryforward 9,000 (continues) 1,500 9,000 Current asset if expected to be realized in 2014 16-49 Accounting for NOL Carryforward The firm reports a taxable income of $50,000 in 2014 The tax carryforward allows management to deduct the carryforward from the $15,000 tax ($50,000 × 30) that would be due without the carryforward Journal Entry in 2014: Income Tax Expense Income Taxes Payable 6,000 Deferred Tax Asset—NOL Carryforward (continues) 9,000 15,000 16-50 Accounting for NOL Carryforward • If, however, it is more likely than not that some portion or all of the deferred tax asset will not be realized, a valuation allowance account is needed • To illustrate, assume that Prairie Company’s management believes that losses will continue in the future and the tax benefit will not be realized As a result, management believes it is more likely than not that none of the asset will be realized (continues) 16-51 Accounting for NOL Carryforward The journal entry to record the carryback and carryforward would be as follows: Income Tax Refund Receivable Deferred Tax Asset—NOL Carryforward Income Tax Benefit from NOL Carryback 1,500 Allowance to Reduce Deferred Tax Asset to Realizable Value— NOL Carryforward 9,000 1,500 9,000 16-52 Scheduling for Enacted Future Tax Rates • Proper recognition of deferred tax assets and liabilities is required when future tax rates are expected to differ from current tax rates • The firm must determine the temporary differences that will reverse • Statement No 109 eliminates much of the need for scheduling through the “more-likely-than-not” criterion for future income 16-53 Financial Statement Presentation and Disclosure The income statement must show, either in the body of the statement or in a note, the following components of income taxes related to continuing operations Current tax expense or benefit Deferred tax expense or benefit Investment tax credits Government grants recognized as tax reductions (continues) 16-54 Financial Statement Presentation and Disclosure Benefits of operating loss carryforwards Adjustments of a deferred tax liability or asset for enacted changes in tax laws or rates or a change in the tax status of an enterprise Adjustments in beginning-of-the-year valuation allowance because of a change in circumstances 16-55 International Accounting for Deferred Taxes • No-deferral approach―Using this approach, the differences are ignored Income tax expense equal to the amount of tax payable for the year is reported • Comprehensive recognition approach―Deferred taxes are included in the computation of income tax expense and reported on the balance sheet (continues) 16-56 International Accounting for Deferred Taxes • Partial recognition approach―A deferred tax liability is recorded only to the extent that the deferred taxes are actually expected to be paid in the future 16-57 ... Tax Asset— Noncurrent Income Taxes Payable 16, 000 8,800 2,400 4,800 1/3 × $7,200 $16, 000 current – $7,200 deferred benefits 2/3 × $7,200 (continues) 16- 30 Example 4: Deferred Tax Asset Sandusky’s... 5,000 16- 14 Illustration of Permanent and Temporary Differences • The permanent differences are not included in either the financial income subject to tax or the taxable income • In general, the accounting. .. reporting of balance sheet amounts • One drawback of this method is that it is too complicated 16- 16 Annual Computation of Deferred Tax Liabilities and Assets Advantages of the asset and liability