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Inter Acct Chapter_16_part_2

Inter Acct Chapter_16_part_2 - Chapter 16 part 2 Question...

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Chapter 16 part 2 Question 16-7 A deferred tax liability (or asset) is based on enacted tax rates and laws. Hudson should use the 35% rate, the currently enacted tax rate that will be effective in the year(s) the temporary difference reverses. Calculations are not based on anticipated legislation that would alter the company’s tax rate. Question 16-8 When a change in a tax law or rate occurs, a deferred tax liability or asset must be adjusted to reflect the amount to be paid or recovered in the future. If a deferred tax liability was established with the expectation that the future taxable amount would be taxed at 34%, it would now be adjusted to reflect taxation at 36% instead. The usual practice of recalculating the desired balance in a deferred tax liability each period and comparing that amount with any previously existing balance automatically takes into account tax rate changes. The effect is reflected in operating income (adjustment to income tax expense) in the year of the enactment of the change in the tax law or rate.
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Answers to Questions (continued) Question 16-9 The income tax benefit of either an operating loss carryback or an operating loss carryforward is recognized for accounting purposes in the year the operating loss occurs. The net after-tax operating loss reflects the reduction of past taxes from the loss carryback or future tax savings that the loss carryforward is expected to create. An operating loss carryforward creates future deductible amounts, so a deferred tax asset is recognized for an operating loss carryforward. The deferred tax asset is then reduced by a valuation allowance if it is “more likely than not” that some portion or all of the deferred tax asset will not be realized due to insufficient taxable income expected in the carryforward years. Question 16-10 Deferred tax assets and deferred tax liabilities are not reported individually, but combined instead into a net current amount and a net noncurrent amount. Each is reported as either an asset – if deferred tax assets exceed deferred tax liabilities, or as a liability – if deferred tax liabilities exceed deferred tax assets. Deferred tax assets and deferred tax liabilities are classified as either current or noncurrent according to how the related assets or liabilities are classified for financial reporting. For instance, a deferred tax liability arising from estimated warranty expenses would be classified as current if the warranty liability is classified as current . A deferred tax asset or liability that is not related to a specific asset or liability should be classified according to when the underlying temporary difference is expected to reverse. Question 16-11 Regarding deferred tax amounts reported in the balance sheet, disclosure notes should indicate (a) the total of all deferred tax liabilities, (b) the total of all deferred tax assets, (c) the total valuation allowance recognized for deferred tax assets, (d) the net change in the valuation
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Inter Acct Chapter_16_part_2 - Chapter 16 part 2 Question...

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