Ch16 Accounting.for.Income.Taxes

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Accounting for Income Taxes

Describe the types of temporary differences

that cause deferred tax liabilities and determine the amounts needed to record

periodic income taxes

Identify and describe the types of temporary differences that cause deferred tax assets

The Internal Revenue Code is the set of rules for preparing tax returns.

The Internal Revenue Code is the set of rules for preparing tax returns.

Financial statement

income tax expense.

Financial statement

income tax expense IRS income taxes payable.

IRS income taxes

payable.

GAAP is the set of rules for preparing

financial statements.

GAAP is the set of

rules for preparing

financial statements.

Usually

The objective of accounting for income taxes is to

recognize a deferred tax liability or deferred tax asset for the tax consequences of amounts that will become

taxable or deductible in future years as a result of

transactions or events that already have occurred.

The objective of accounting for income taxes is to

recognize a deferred tax liability or deferred tax asset for the tax consequences of amounts that will become

taxable or deductible in future years as a result of

transactions or events that already have occurred.

Temporary differences will reverse out in

one or more future periods.

Temporary differences will reverse out in

one or more future periods.

Accounting Income>Taxable Income

Future Taxable Amounts

Deferred Tax Liability (TK 347)

Accounting Income<Taxable Income

Future Deductible Amounts Deferred Tax Asset (TK 243)

In 2012, Baxter reports $300,000 of pretax income Included in this

amount is $100,000 resulting from revenue earned from an

installment sale for which no cash was collected The revenue will be taxed as the cash is collected in 2013 and 2014 Baxter expects to collect $70,000 in 2013 and the remaining $30,000 in 2014 In 2013 and 2014, Baxter reports $200,000 of pretax income The company is

subject to a 32% tax rate

There are no other temporary differences.

In 2012, Baxter reports $300,000 of pretax income Included in this

amount is $100,000 resulting from revenue earned from an

installment sale for which no cash was collected The revenue will be taxed as the cash is collected in 2013 and 2014 Baxter expects to collect $70,000 in 2013 and the remaining $30,000 in 2014 In 2013 and 2014, Baxter reports $200,000 of pretax income The company is

subject to a 32% tax rate

There are no other temporary differences.

Description Debit Credit

Income tax expense 96,000 Income tax payable 64,000 Deferred tax liability 32,000

2012 Income tax payable = $200,000 × 32% = $64,000

2012 Deferred tax liability change = ($100,000 × 32%) - $0 = $32,000

2012 Income tax payable = $200,000 × 32% = $64,000

2012 Deferred tax liability change = ($100,000 × 32%) - $0 = $32,000

2013 2014 Total Future taxable amounts $ 70,000 $ 30,000 $ 100,000

Deferred tax liability $ 32,000

32,000

Deferred Tax Liability

The Deferred Tax

Description Debit Credit

Income tax expense 96,000 Income tax payable 64,000 Deferred tax liability 32,000

General Journal

Description Debit Credit Income tax expense 64,000

Deferred tax liability 22,400 Income tax payable 86,400

General Journal

Income tax expense 64,000 Deferred tax liability 22,400 Income tax payable 86,400

General Journal

Recall this information for

Baxter.

2013 Income tax payable = $270,000 × 32% = $86,400

2013 Deferred tax liability change = ($30,000 × 32%) - $32,000 = $22,400

2013 Income tax payable = $270,000 × 32% = $86,400

2013 Deferred tax liability change = ($30,000 × 32%) - $32,000 = $22,400

2014 Total Future taxable amounts $ 30,000 $ 30,000

Deferred tax liability $ 9,600

The Deferred Tax Liability represents the future taxes

Baxter will pay in 2014.

Originating difference Reversing difference

Description Debit Credit Income tax expense 64,000

Deferred tax liability 9,600 Income tax payable 73,600

General Journal

Income tax expense 64,000 Deferred tax liability 9,600 Income tax payable 73,600

Baxter.

2014 Income tax payable = $230,000 × 32% = $73,600

2014 Deferred tax liability change = ($0 × 32%) - $9,600

= $9,600

2014 Income tax payable = $230,000 × 32% = $73,600

2014 Deferred tax liability change = ($0 × 32%) - $9,600

= $9,600

Deferred tax liability $

-Future

Taxable

Amount

Schedule

The Deferred Tax Liability represents the future taxes

Baxter will pay.

Health Magazine received $150,000 of subscriptions in

advance during 2012

Subscription revenue will be earned equally in 2013,

2014 and 2015 for financial accounting purposes

The entire $150,000 will be taxed in 2012

There is additional income of $500,000 in each year

The company is subject to a 30% tax rate in each year.

Originates

2012 2013 2014 2015 Total Accounting income $ 500,000 $ 550,000 $ 550,000 $ 550,000 $ 2,150,000 Subscription revenue on

the income statement (50,000) (50,000) (50,000) (150,000) Subscription revenue

on the tax return 150,000 150,000 Taxable income $ 650,000 $ 500,000 $ 500,000 $ 500,000 $ 2,150,000

Reverses Temporary Difference

Calculation of Deferred Tax

Future deductible amount $ (50,000) $ (50,000) $ (50,000) $ (150,000)

Now, let’s record the income tax entry for 2006.

This is the computation for the Deferred Tax Asset.

Originates

2012 2013 2014 2015 Total Accounting income $ 500,000 $ 550,000 $ 550,000 $ 550,000 $ 2,150,000 Subscription revenue on

the income statement (50,000) (50,000) (50,000) (150,000) Subscription revenue

on the tax return 150,000 150,000 Taxable income $ 650,000 $ 500,000 $ 500,000 $ 500,000 $ 2,150,000

Reverses Temporary Difference

Description Debit Credit Income tax expense 150,000

Deferred tax asset 45,000

Income tax payable 195,000

General Journal

Income tax expense 150,000

Deferred tax asset 45,000

Income tax payable 195,000

General Journal

Originates

2012 2013 2014 2015 Total Accounting income $ 500,000 $ 550,000 $ 550,000 $ 550,000 $ 2,150,000 Subscription revenue on

the income statement (50,000) (50,000) (50,000) (150,000) Subscription revenue

on the tax return 150,000 150,000 Taxable income $ 650,000 $ 500,000 $ 500,000 $ 500,000 $ 2,150,000

Reverses Temporary Difference

2012 Income tax payable = $650,000 × 30% = $195,000

2012 Deferred tax asset change = [($150,000 × 30%] - $0

= $45,000

2012 Income tax payable = $650,000 × 30% = $195,000

2012 Deferred tax asset change = [($150,000 × 30%] - $0

= $45,000

2012 45,000

Balance 45,000

Deferred Tax Asset

After posting the entry, the Deferred Tax Asset account

will have the desired ending balance of $45,000.

Income tax expense 150,000

Deferred tax asset 45,000

Income tax payable 195,000

General Journal

Income tax expense 150,000

Deferred tax asset 45,000

Income tax payable 195,000

General Journal

Calculation of Deferred Tax

Future deductible amount $ (50,000) $ (50,000) $ (50,000) $ (150,000)

Description Debit Credit Income tax expense 165,000

Deferred tax asset 15,000 Income tax payable 150,000

General Journal

Income tax expense 165,000 Deferred tax asset 15,000 Income tax payable 150,000

General Journal

Originates

2012 2013 2014 2015 Total Accounting income $ 500,000 $ 550,000 $ 550,000 $ 550,000 $ 2,150,000 Subscription revenue on

the income statement (50,000) (50,000) (50,000) (150,000) Subscription revenue

on the tax return 150,000 150,000 Taxable income $ 650,000 $ 500,000 $ 500,000 $ 500,000 $ 2,150,000

Reverses

2013 Income tax payable = $500,000 × 30% = $150,000

2013 Deferred tax asset change = [($100,000) × 30%] - $45,000 = ($15,000)

2013 Income tax payable = $500,000 × 30% = $150,000

2013 Deferred tax asset change = [($100,000) × 30%] - $45,000 = ($15,000)

In 2013, the balance in the Deferred Tax Asset should

Can you prepare the entries for 2014 and 2015?

Calculation of Deferred Tax

Future deductible amount $ (50,000) $ (50,000) $ (100,000)

This would be the entry for 2014 and 2015.

-Deferred Tax Asset

At the end of 2015, the balance in the Deferred

Tax Asset would be zero.

Income tax expense 165,000

Deferred tax asset 15,000

Income tax payable 150,000

General Journal

Income tax expense 165,000

Deferred tax asset 15,000

Income tax payable 150,000

General Journal

Explain why nontemporary differences have no

deferred tax consequences

Describe when and how an operating loss carryforward and an operating loss carryback are recognized in the financial statements.

Tax laws often allow a company to use tax

NOLs to offset taxable income in earlier or

subsequent periods.

Tax laws often allow a company to use tax

NOLs to offset taxable income in earlier or

subsequent periods.

When used to offset

earlier taxable income:

 Called: operating loss

carryback.

 Result: tax refund.

When used to offset

earlier taxable income:

 Called: operating loss

carryback

 Result: tax refund

When used to offset future taxable income:

 Called: operating loss

Current Year

-1 -2

Carryback

Period

+3 +2

Carryforward

Period

The NOL may first be applied against taxable

income from two previous years

Unused NOL may be carried forward for 20

years

The NOL may first be applied against taxable

income from two previous years Unused NOL may be carried forward for 20

years

In 2012 Garson, Inc incurred an $85,000 net

operating loss The company is subject to a

30% tax rate In 2010, Garson reported taxable income of $20,000, and in 2011, taxable income was $10,000 The company

elects to carryback the NOL.

In 2012 Garson, Inc incurred an $85,000 net

operating loss The company is subject to a

30% tax rate In 2010, Garson reported taxable income of $20,000, and in 2011, taxable income was $10,000 The company

elects to carryback the NOL.

Tax

year

Taxable Income

Tax rate

Taxes Paid

2010 $ 20,000 30% $ 6,000

2011 10,000 30% 3,000

Let’s look at the tax benefits of the operating loss carryback and carryforward.

Current Year

Description Debit Credit Receivable income tax refund 9,000

Deferred tax asset 16,500

Income tax

operating loss 25,500

Description Debit Credit Receivable income tax refund 9,000

Deferred tax asset 16,500

Income tax

operating loss 25,500

Operating loss before income taxes $ (85,000)

Benefit of NOL carryback 9,000

Benefit of NOL carryforward 16,500

Garson, Inc.

Partial Income Statement For the Year Ended December 31, 2006

Garson, Inc.

Partial Income Statement For the Year Ended December 31, 2006

The deferred tax asset account created by the

benefit of the carryforward will be used to lower

income taxes payable in future years.

The deferred tax asset account created by the

benefit of the carryforward will be used to lower

income taxes payable in future years.

Operating loss before income taxes $ (85,000)

Benefit of NOL carryback 9,000

Benefit of NOL carryforward 16,500

Garson, Inc.

Partial Income Statement For the Year Ended December 31, 2012

Garson, Inc.

Partial Income Statement For the Year Ended December 31, 2012

The deferred tax asset account created by the

benefit of the carryforward will be used to lower

income taxes payable in future years.

The deferred tax asset account created by the

benefit of the carryforward will be used to lower

income taxes payable in future years.