302Chapter 16 notes

302Chapter 16 notes - CHAPTER 16 I Income Taxes I LEARNING...

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C HAPTER 16 I Income Taxes I L EARNING O BJECTIVES 1. Understand the concept of deferred taxes and the distinction between permanent and temporary differences. C Deferred taxes result from the different objectives being used and applied for computing taxable income and income for financial reporting purposes. C Temporary timing differences that result in taxable income in the future are termed taxable temporary differences and result in deferred tax liabilities. C Those differences that result in expected deductible amounts in the future are termed deductible temporary differences and result in deferred tax assets. 2. Compute the amount of deferred tax liabilities and assets. C Computing deferred tax assets and liabilities involves four steps: < Identify the types and amounts of temporary timing differences, < Compute the deferred tax liability associated with taxable temporary differences using current and future tax rates, < Compute the amount of deferred tax asset associated with deductible temporary differences using current and future tax rates, and < Reduce the amount of deferred tax asset if it is more likely than not that some or all of the asset may not be realized, using a valuation allowance account. 3. Explain the provisions of tax loss carrybacks and carryforwards, and be able to account for these provisions. C Tax law requires corporations to pay taxes if they report taxable income. < If a business reports a loss, the tax code allows the business to offset the loss against income in other years. < The business is allowed to carry back its net operating losses up to three years to obtain a refund of taxes previously paid or to carry forward an operating loss up to fifteen years in order to reduce the tax liability associated with future periods. 1
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C A carryforward results in a deferred tax asset and may require the use of a valuation allowance account if it is more likely than not that the deferred asset may not be realized. 4. Schedule future tax rates, and determine the effect on tax assets and liabilities. C Deferred tax assets and liabilities are recorded at the tax rates expected to be in effect in the periods of reversal. C Thus, if Congress enacts rate changes or the corporation’s taxable income level results in different expected future tax rates, these differing rates must be reflected in the valuation of deferred tax assets and liabilities. 5. Determine appropriate financial statement presentation and disclosure associated with deferred tax assets and liabilities. C Deferred tax assets and liabilities are disclosed on the balance sheet as either current or noncurrent, based on the classification of the underlying asset or obligation. C
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302Chapter 16 notes - CHAPTER 16 I Income Taxes I LEARNING...

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