Final Notepapers.docx - Vc bTemporary Differences Steps...

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Vc bTemporary Differences Steps : Payable, Deferred, Expense. BI<TI Deferred tax assets Income tax expense XXX Deferred tax assets XXX Income tax payable XXX (When reversing: DTA in Credit) BI>TI Deferred tax liabilities Income tax expense XXX Deferred tax liability XXX Income tax payable XXX (When reversing: DTL in Debit) If record income taxes: Income Tax Expense 100 Deferred Tax Liability 10 Income Taxes Payable 90 Then, financial statement footnotes: Deferred portion of tax expense = 10 Current portion of tax expense = 90 DTA never realized ( Allowance ): Income tax expense XXX Valuation Allowance – DTA XXX (Now, net DTA decrease by XXX.) Allowance Adjustment : Allowance – DTA XXX Income tax expense XXX Permanent Differences Steps : Deferred, Payable, Expense. ABC has pre-tax financial income of 97,000 which includes an expense of $3,000 that is never deductible for tax purposes. The tax rate is 40%. To record tax expense: Income Tax Expense 40,000 Income Tax Payable 40,000* *IT Payable = (97,000 + 3,000) x 40% Tax expense ≠ book income x tax rate ABC has pre-tax financial income of 97,000 which includes an expense of $3,000 that is never deductible for tax purposes and an expense of $4,000 that will be deductible next year. The tax rate is 40%. To record tax expense: Income Tax Expense 40,000 Deferred Tax Asset 1,600* Income Tax Payable 41,600** *Deferred Tax Asset = 4,000 x 40% **Income Tax Payable = (97,000 + 4,000 + 3,000) x 40% Carry Back : last 2 years (tax refund) Income tax refund receivable XXX Benefit due to Loss Carryback XXX Carry Forward : next 20 years (DTA) Deferred tax asset XXX Benefit due to loss carryforward XXX To record tax expense including the use of the remaining NOL carryforward benefit: Income tax expense XXX Deferred tax asset XXX Income tax payable XXX To record allowance for expected unused benefit: Benefit due to loss carryforward XXX Allowance-DTA XXX Rate Change: ABC’s existing deferred tax liability is $190,000 but should be $192,000 after the change in the 2016 tax rate enacted in 2014. In 2014, to record the enacted 2016 rate change: Income tax expense 2,000 Deferred tax liability 2,000 Bond Valuation A firm offers $1000 of 4% bonds that are payable in 10 years with annual interest payments ($1000 x 4% = $40). If the market rate today is 5%, what is the value of the bond? PV of Principal (n = 10, r = 5%) = $1000 x 0.61391= $613.91 PV of Interest Payments (n = 10, r = 5%) = $40 x 7.72173 = $308.87 So, PV of bond = $613.91 + $308.87 = $922.78 Issue Bonds PV < FV bond sold at a discount, (PV/FV) Issue Bond at discount : Cash XXX Discount on Bond Payable XXX Bonds Payable XXX PV > FV sell at a premium, (PV/FV) Issue Bond at premium : Cash XXX Premium on Bonds Payable XXX Bonds Payable XXX Bonds Issue Costs (20,000 for 5-year SL) At issue : Unamortized Bond Issue Costs 20,000 Cash 20,000 At each year : Bond Issue Expense 4,000 Unamortized Bond Issue Costs 4,000 To record interest accrued but not yet paid : Interest Expense XXX Interest payable XXX Then at payment : Interest payable XXX Cash XXX To record interest accrue and paid at same FY: Interest expense XXX Cash XXX SL (1/1/14) issue 100,000, 5-year 7% bonds at 102.

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