Chapter_19_Notes

Chapter_19_Notes - Chapter 19 Notes Accounting for Income...

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Chapter 19 Notes – Accounting for Income Taxes There are different rules for financial accounting and tax accounting. This could lead to a difference between income tax expense on the financial statements and income taxes payable to the IRS. Pretax financial income is the same as income before taxes and is used in financial reporting. Taxable income indicates the amount used to compute income taxes payable and is used for tax purposes. Differences between these numbers occur because companies use full accrual accounting for financial reporting and a modified cash basis for tax purposes. Any difference is referred to as a deferred tax amount: Deferred Tax Liabilities (DTL) arise when taxes will be higher in the future (i.e., the current payable amount is less than the expense) o If, in the CY, TI<FI, then paying less tax now. Therefore, there will be a deferred tax LIABILITY on the CY BS because you will owe tax in the future when the difference reverses. Chapter 19 Notes 1
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Deferred Tax Assets (DTA) arise when taxes will be lower in the future (i.e., the current payable amount is greater than the expense) o If, in the CY, TI>FI, then paying more tax now. Therefore, there will be a deferred tax ASSET on the CY BS because you will have a tax benefit in the future when the difference reverses. Differences are temporary differences – difference b/t the tax basis of an asset/liability and its reported (CV or BV) amount in the financial statements. Results in either: Taxable amounts – increase taxable income in future years Deductible amounts – decrease taxable income in future years See Ill.19-22 for examples of temporary differences Permanent Difference – Nondeductible expenses or nontaxable revenues that are recognized for financial statement purposes but are never part of taxable income. Examples: Nontaxable revenues - proceeds from life insurance and interest on municipal bonds. Nondeductible expenses - fines for violation of laws and payment of life insurance premiums. See Ill.19-24 for other examples of permanent differences. Chapter 19 Notes 2
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because they are never included in the computation of taxable income. Terms: Income tax payable = liability for the CY based on TI, what the IRS expects to collect in the CY. Deferred tax liability = future liability (taxable amount) according to FS. Not an existing liability according to the IRS. Must report this according to GAAP and rules of accrual based accounting. Deferred tax assets = future asset (deductible amount) according to FS. Income tax expense = The total of current and deferred tax liabilities/assets. Chapter 19 Notes
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This note was uploaded on 02/25/2011 for the course ACCT 3021 taught by Professor Delaune during the Fall '06 term at LSU.

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Chapter_19_Notes - Chapter 19 Notes Accounting for Income...

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