Accounting 312- chapter 15 - Accounting 312 Chapter 15...

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Accounting 312 Chapter 15- Accounting for Income Taxes I. Fundamentals of Accounting for Income Taxes A. because GAAP and tax regulations differ, so do pretax financial income and taxable income: the amt that a co reports as tax expense will differ from the amt of taxes payable to IRS 1. pretax financial income a. financial reporting term b. called income before taxes, income for financial reporting purposes, income for book purpose c. objective is to provide useful info to investors and creditors d. according to GAAP 2. taxable income a. is a tax accounting term b. indicates the amt used to compute income tax payable c. according to IRS 3. income tax exp and inc tax pay can be different for a few yrs, but the same in total 4. why the difference? a. for financial reporting, co use the accrual method to report revenues and for tax purposes they use a modified cash basis b. when taxes will be higher in the future, the difference represents taxes that the co will pay in the future: deferred tax liability c. when taxes will be lower in the future, it is a deferred tax asset B. Future Taxable Amts and Deferred Taxes 1. a temporary difference between the amt reported for tax purposes and those reported for book purposes are the differences between the tax basis of an asset or liability and its reported amt in the financial statements, which will result in taxable amts or deductible amts in future yrs a. taxable amts increase taxable income in future years b. deductible amts decrease taxable income in future yrs 2. assume companies recover and settle the assets and liabilities at their reported amounts, which creates a requirement under accrual acctg to recognize currently the deferred tax consequences of temporary differences C. Deferred Tax Liability 1. deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year 2. computation: book basis of A/R 30,000 tax basis of A/R 0 temp. difference 30,000 tax rate .4 deferred tax liab 12,000 3. compute income tax exp: deferred tax liab at end of 2008 12000 deferred tax liab at beg of 2008 0 deferred tax exp for 2008 12000 current tax exp for 2008 (inc tax pay) 16000 inc tax exp (total) 2008 28000 4. income tax exp has two components: current tax exp (the amt of inc tax pay for the period) and deferred tax exp (the increase in the deferred tax liab balance from the beg to the end of the acctg pd)
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5. journal: income tax exp 28000 inc tax pay 16000 deferred tax liab 12000 6. at the end of the next yr, the diff between the book basis and the tax basis would be X, which would be multiplied by the tax rate to arrive at the deferred tax liab for the that yr a. it will be neg and will reduce the amt of the deferred liab over the next few yrs D. Objectives 1. recognize the amt of taxes payable or refundable for the current yr 2. recognize deferred tax liab and assets for the future tax consequences of events already recognized in the financial statements or tax returns
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Accounting 312- chapter 15 - Accounting 312 Chapter 15...

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