Handout_11_(APSCW_-_F2009)

Handout_11_(APSCW_-_F2009) - FINANCIALACCOUNTING...

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BUSI W3013 Handout 11 | Page 1 F INANCIAL A CCOUNTING BUSI W3013 | F ALL 2009 H ANDOUT 11 PROFESSOR ANDREW SCHMIDT 1.0 Introduction ……………………………… 1 2.0 Book Tax Differences ……………………………… 2 3.0 Measurement and Accounting Treatment ……………………………… 7 4.0 Net Operating Losses ……………………………… 10 5.0 Incomes Taxes and the Statement of Cash Flows ……………………………… 11 6.0 Financial Statement Analysis of Income Taxes ……………………………… 11 7.0. Disclosure Requirements ……………………………… 12 8.0 Practice Exercises and Solutions ……………………………… 21 9.0 Problem Set 10 ……………………………… 46 10.0 Appendix ……………………………… 53 H ANDOUT O BJECTIVES : A CCOUNTING F OR I NCOME T AXES 1. Understand the different reporting objectives for book purposes and tax purposes 2. Understand the notion of tax basis 3. Describe the two basic types of book-tax differences and the items that cause the differences 4. Understand the relationship between tax expense, taxes payable, and deferred taxes 5. Explain the purpose of the DTA valuation allowance 6. Understand net operating losses (NOLs) and how to account for them. 7. Understand uncertain tax benefits (UTBs) and how to account for them. 8. Understand how to read and interpret tax disclosures 1.0. I NTRODUCTION Income measurement for financial reporting is governed by GAAP, while income measurement for determining taxable income is governed by the Internal Revenue Code (IRC). GAAP and the IRC treat many transactions differently, so pretax income in the financial statements and taxable income in the tax return will usually be different (hereafter, we will refer to revenues, expenses, and pretax income reported in the financial statements as book revenues, book expenses, and book income , respectively). Therefore, the main accounting issue with respect to the accounting for income taxes is: should the income tax expense in the financial statements be based on taxable income or on book income? To fully understand the accounting for income taxes under GAAP, we must understand the notion of tax basis . Every asset and liability on the balance sheet has a book value and what is referred to as a tax basis . The tax basis of an asset or liability is the “book value” that results
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BUSI W3013 Handout 11 | Page 2 from applying the income tax laws in recording the asset or liability. For example, different depreciation methods are used for book purposes (straight-line depreciation) and tax purposes (MACRS), so depreciation expense will be different (as will accumulated depreciation), which results in a difference between the book value and the tax basis of the asset being depreciated. Example 1:
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This note was uploaded on 02/27/2011 for the course BUSINESS 101 taught by Professor S during the Spring '10 term at Columbia College.

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Handout_11_(APSCW_-_F2009) - FINANCIALACCOUNTING...

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