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# Class+16-2 - ACG 3141 Chapter 16(Part 2 Class 16 Lecture...

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ACG 3141: Chapter 16 (Part 2) Class 16 Lecture Slides Accounting for Income Taxes

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2 Topic Schedule Class 16 (February 27, 2008): Rate Application and Reconciliation Net Operating Losses Classification of Deferred Tax Liabilities and Assets Intraperiod Tax Allocation
3 Tax Rates and Reconciliation Tax Rates: Deferred Tax Assets and Liabilities reflect ENACTED tax rates. Proposed legislation will not affect the calculation . In the year of origination, the DTA or DTL must reflect the known tax rates of the future reversal years. In the reversal years, the DTA or DTL must be adjusted to reflect rate changes. Look at E16-13 (assigned homework – solution also in the Homework solutions) Look at E16-14

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4 E16-13 E 16-13:  Allmond Corporation, organized on January 3, 2006, had pretax  accounting income of \$14 million and taxable income of \$20 million for the year  ended December 31, 2006. The 2006 tax rate is 35%. The only difference  between accounting income and taxable income is estimated product warranty  costs. Expected payments and scheduled tax rates (based on recent tax  legislation) are as follows: 1. Determine the amounts necessary to record Allmond’s income taxes for 2006 and prepare the appropriate journal entry. 2. What is Allmond’s 2006 net income?
5 Solution to E16-3 E16-13 Solution 1. Determine the amounts necessary to record Allmond’s income taxes for 2006 and prepare the appropriate journal entry. GAAP Pretax Net Income 14,000,000 Add: Future Deductible Amount Warranty Expense 6,000,000 * Taxable Income 20,000,000 Tax Rate: 35% Income Tax Payable 7,000,000 * Future Deductible Amount Gross Rate DTA to record 2007 2,000,000 30% 600,000 2008 1,000,000 30% 300,000 2009 1,000,000 30% 300,000 2010 2,000,000 25% 500,000 6,000,000 1,700,000 Entry: Debit Income Tax Expense 5,300,000 Debit Deferred Tax Asset 1,700,000 Credit Income Taxes Payable 7,000,000 2. What is Allmond's 2006 Net Income: Allmond's 2006 Net Income: GAAP Pretax Net Income 14,000,000 Less: Income Tax Expense (5,300,000) GAAP Net Income 8,700,000

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6 E16-14 Arnold Industries has pretax accounting income of \$33 million for the year ended December 31, 2006. The tax rate is 40%. The only difference between accounting income and taxable income relates to an operating lease in which Arnold is the lessee. The inception of the lease was December 28, 2006. An \$8 million advance rent payment at the inception of the lease is tax-deductible in 2006 but, for financial reporting purposes, represents prepaid rent expense to be recognized equally over the four-year lease term. Required: 1. Determine the amounts necessary to record Arnold’s income taxes for 2006 and prepare the appropriate journal entry. 2. Determine the amounts necessary to record Arnold’s income taxes for 2007 and prepare the appropriate journal entry. Pretax accounting income was \$50 million for the year ended December 31, 2007. 3.
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Class+16-2 - ACG 3141 Chapter 16(Part 2 Class 16 Lecture...

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