The deferred tax asset account created by the benefit of the carryforward will be used to lower. income taxes payable in future years[r]
(1)(2)Describe the types of temporary differences that cause deferred tax liabilities and
determine the amounts needed to record periodic income taxes
(3)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
Results in Results in
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
(4)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
(5)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
(6)Description Debit Credit
Income tax expense 96,000
Income tax payable 64,000 Deferred tax liability 32,000
General Journal
2012 Income tax payable = $200,000 × 32% = $64,000 2012 Income tax payable = $200,000 × 32% = $64,000
2012 Deferred tax liability change = ($100,000 × 32%) - $0 2012 Deferred tax liability change = ($100,000 × 32%) - $0
= $32,000 = $32,000
2012 Income tax payable = $200,000 × 32% = $64,000
2012 Income tax payable = $200,000 × 32% = $64,000
2012 Deferred tax liability change = ($100,000 × 32%) - $0
2012 Deferred tax liability change = ($100,000 × 32%) - $0
= $32,000
(7)The Deferred Tax Liability
represents the future taxes Baxter
will pay in 2013 and 2014.
Description Debit Credit
Income tax expense 96,000
Income tax payable 64,000 Deferred tax liability 32,000
(8)Description Debit Credit
Income tax expense 64,000
Deferred tax liability 22,400
Income tax payable 86,400
General Journal
Description Debit Credit
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 Income tax payable = $270,000 × 32% = $86,400
2013 Deferred tax liability change = ($30,000 × 32%) - $32,000 2013 Deferred tax liability change = ($30,000 × 32%) - $32,000
= $22,400 = $22,400
2013 Income tax payable = $270,000 × 32% = $86,400 2013 Income tax payable = $270,000 × 32% = $86,400
2013 Deferred tax liability change = ($30,000 × 32%) - $32,000
2013 Deferred tax liability change = ($30,000 × 32%) - $32,000
= $22,400
(9)Future Taxable Amount Schedule
The Deferred Tax Liability represents the future taxes Baxter will pay in 2014.
Originating difference
(10)Description Debit Credit
Income tax expense 64,000
Deferred tax liability 9,600
Income tax payable 73,600
General Journal
Description Debit Credit
Income tax expense 64,000
Deferred tax liability 9,600
Income tax payable 73,600
General Journal Recall this
information for Baxter.
2014 Income tax payable = $230,000 × 32% = $73,600 2014 Income tax payable = $230,000 × 32% = $73,600
2014 Deferred tax liability change = ($0 × 32%) - $9,600 2014 Deferred tax liability change = ($0 × 32%) - $9,600
= $9,600 = $9,600
2014 Income tax payable = $230,000 × 32% = $73,600 2014 Income tax payable = $230,000 × 32% = $73,600 2014 Deferred tax liability change = ($0 × 32%) - $9,600
2014 Deferred tax liability change = ($0 × 32%) - $9,600
= $9,600
(11)Reversing difference
Future Taxable Amount Schedule
(12)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
(13)(14)Description Debit Credit Income tax expense 150,000
Deferred tax asset 45,000
Income tax payable 195,000 General Journal
Description Debit Credit
Income tax expense 150,000 Deferred tax asset 45,000
Income tax payable 195,000
General Journal
2012 Income tax payable = $650,000 × 30% = $195,000 2012 Income tax payable = $650,000 × 30% = $195,000
2012 Deferred tax asset change = [($150,000 × 30%] - $0 2012 Deferred tax asset change = [($150,000 × 30%] - $0 = $45,000
= $45,000
2012 Income tax payable = $650,000 × 30% = $195,000
2012 Income tax payable = $650,000 × 30% = $195,000
2012 Deferred tax asset change = [($150,000 × 30%] - $0
2012 Deferred tax asset change = [($150,000 × 30%] - $0
= $45,000
(15)After posting the entry, the Deferred Tax Asset account will have the desired ending balance of $45,000.
Description Debit Credit
Income tax expense 150,000 Deferred tax asset 45,000
Income tax payable 195,000 General Journal
Description Debit Credit
Income tax expense 150,000 Deferred tax asset 45,000
Income tax payable 195,000
(16)Description Debit Credit Income tax expense 165,000
Deferred tax asset 15,000 Income tax payable 150,000
General Journal
Description Debit Credit
Income tax expense 165,000
Deferred tax asset 15,000 Income tax payable 150,000
General Journal
2013 Income tax payable = $500,000 × 30% = $150,000 2013 Income tax payable = $500,000 × 30% = $150,000
2013 Deferred tax asset change = [($100,000) × 30%] - $45,000 2013 Deferred tax asset change = [($100,000) × 30%] - $45,000
= ($15,000) = ($15,000)
2013 Income tax payable = $500,000 × 30% = $150,000
2013 Income tax payable = $500,000 × 30% = $150,000
2013 Deferred tax asset change = [($100,000) × 30%] - $45,000
2013 Deferred tax asset change = [($100,000) × 30%] - $45,000
= ($15,000)
(17)In 2013, the balance in the Deferred Tax Asset should decrease to $30,000.
Reversing difference
Originating difference
Can you prepare the entries for 2014 and 2015?
Calculation of Deferred Tax
Asset 2008 2009 Total
Future deductible amount $ (50,000) $ (50,000) $ (100,000)
Enacted tax rate 30%
(18)This would be the entry for 2014 and 2015.
At the end of 2015, the balance in the Deferred Tax Asset would be zero.
Description Debit Credit
Income tax expense 165,000
Deferred tax asset 15,000 Income tax payable 150,000
General Journal
Description Debit Credit
Income tax expense 165,000
Deferred tax asset 15,000 Income tax payable 150,000
(19)(20)Describe when and how an operating loss carryforward and an operating loss carryback
(21)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
carryforward.
Result: reduced tax
payable.
When used to offset
future taxable income: Called: operating loss
carryforward.
Result: reduced tax
(22)Current Year
-1 -2
Carryback Period
+3 +2
+1 +4 +5 +20
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
(23)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.
Let’s look at the tax benefits of the operating loss carryback and
(24)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
(25)Operating loss before income taxes $ (85,000)
Benefit of NOL carryback 9,000
Benefit of NOL carryforward 16,500
Net loss $ (59,500)
Garson, Inc.
Partial Income Statement
For the Year Ended December 31, 2006
Operating loss before income taxes $ (85,000)
Benefit of NOL carryback 9,000
Benefit of NOL carryforward 16,500
Net loss $ (59,500)
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.
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
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