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Chapter 16-1) - ACG 3141 Chapter 16 Accounting for Income...

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ACG 3141: Chapter 16 Accounting for Income Taxes
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2 Topic Schedule Class 15 (February 25, 2008): FAS 109 Introduction and General Concepts Book / Tax Differences Permanent Differences in General Temporary Differences in General Examples of Accounting for Income Taxes Typical Temporary Differences Rate Application
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3 Tax Code Exchanges Investors and Creditors Financial Statements Pretax Financial Income GAAP Income Tax Expense Taxable Income Income Tax Payable Tax Return vs . Fundamentals of Accounting for Income Taxes
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4 FAS 109: General Concepts Income Taxes Payable – Balance Sheet : Determined under Income Tax Rules (i.e., Internal Revenue Code, Regulations, Case Law and Administrative Rulings). These rules determine the actual cash to be paid for income taxes. Deferred Income Tax Liabilities or Assets – Balance Sheet: Where the treatment of an item of income, expense, gain or loss temporarily differs between tax and GAAP, GAAP requires that the company account for the total amount of the difference in the year in which the difference arises (origination date) and “write off” the difference in subsequent years as it reverses. Income Tax Expense (Benefit) – Income Statement: The entry necessary to balance the entries required for IT Payable and Deferred Tax Assets and Liabilities.
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5 FAS 109: General Concepts Dr (Cr) Deferred Tax Asset Based on GAAP rules Dr (Cr) Deferred Tax Liability Based on GAAP rules Cr Income Taxes Payable Based on Tax rules Dr (Cr) Income Tax Expense (Benefit) “Plug”
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6 FAS 109 – General Concepts Approach to FAS 109 Accounting: Determine GAAP Net Income Identify Tax Differences and adjust net income accordingly to arrive at Taxable Income Permanent: Differences that do not reverse Temporary: Differences reverse. “Timing” issues. Multiply timing issues by the applicable tax rate to get adjustments needed to Deferred Tax Liabilities and Deferred Tax Assets Determine Income Tax Payable: Multiply Taxable Income by the applicable tax rate to get Income Taxes Payable Income Tax Expense (Benefit): The amount needed to balance the adjustments. Expense: Indicates a debit needed Benefit: Indicates a credit is needed
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7 Permanent Differences Permanent Differences represent items that will always be treated differently by GAAP and Tax. Examples: Fines and Penalties : Deductible in full for GAAP. Never deductible for Tax. Tax-Exempt Income : Includible in full for GAAP. Never includible for Tax. Tax Exempt Interest Life Insurance Proceeds Deductions Related to Tax Exempt Income : Deductible in full for GAAP. Never deductible for Tax. Expenses related to acquiring Tax Exempt Bond Life Insurance proceeds ½ of Meals and Entertainment : All M&E are fully deductible for GAAP.
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