CHPT_18_TAX_1_+afternoon+class+r

CHPT_18_TAX_1_+afternoon+class+r - OVERVIEW OF ACTG FOR...

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OVERVIEW OF ACTG FOR INCOME TAXES (1) I. WHY “TAXABLE INCOME” MAY DIFFER FROM “INCOME BEFORE TAX” II. METHODS OF COMPUTING TAX PROVISION III. ACCOUNTING STANDARDS IV. ILLUSTRATIVE PROBLEMS V. DISCLOSURE ISSUES
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I. WHY “TAXABLE INCOME” MAY DIFFER FROM “INCOME BEFORE TAX” a) RULES & OBJECTIVES FOR COMPUTING THESE TWO AMOUNTS MAY DIFFER “TAXABLE INCOME” IS BASED ON TAX ACT RULES What are the government’s objectives in setting these rules? To raise money for govt operations To provide incentives for investors to invest in certain areas of economy What are management’s goals in reporting taxable income? Minimize tax, defer tax into future “INCOME BEFORE TAX” IS BASED ON GAAP What are the objectives for reporting income in F/S as set out by the accounting standard setters? Reflect what actually happened during firm (revenue earned, matched expenses) What are management’s goals when choosing among alternative GAAP for reporting accounting income? Consider how NI will affect mgt compensation, avoid violation of debt covenant restrictions, etc.
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b) PERMANENT DIFFERENCES BETWEEN TAXABLE DEFINITION: Revenue or exp item that will affect inc before tax or taxable income, but will never affect the other one. TYPE EXAMPLE 1) Actg revenue never taxable Nontaxable portion of capital gains Dividends from another Cdn corp Nontaxable proceeds on life insurance policy 2 ) Actg expense not tax deductible Club dues Tax penalties Life insurance premiums 3) Tax deduction never recorded as an actg expense Investment tax credit Depletion allowance in excess of asset’s cost
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c) TIMING DIFFERENCES BETWEEN TAXABLE INCOME & INCOME BEFORE TAX DEFINITION: Revenue or exp that will be included in calculation of actg inc in a different period than it is included in computing taxable inc. TYPE EXAMPLE 1) tax deduction taken in earlier period than actg expense recorded CCA > amortization exp 2 ) actg expense recorded in earlier period than tax deduction is allowed Warranty expense recorded at date of sale; tax deduction not allowed until warranty work is done in later period 3) actg revenue recorded in earlier period than it is taxable Installment sale recorded as revenue at date of sale; not taxable until collected in future 4 ) actg revenue recorded in later period, but taxable in earlier period Unearned revenue
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WHAT IS MEANT BY THE TERM “TAX PROVISION”? Amount reported for tax expense in regards to a gain (or tax benefit in regards to loss) HOW WOULD THE TAX PROVISION BE COMPUTED UNDER EACH OF THE FOLLOWING METHODS? a) TAXES PAYABLE (FLOW-THROUGH) METHOD Tax provision = taxes payable (receivable) b) COMPREHENSIVE (INTERPERIOD) TAX ALLOCATION METHOD Tax provision is based on accounting income. Assets & liabilities are recorded to recognize the effects of all
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CHPT_18_TAX_1_+afternoon+class+r - OVERVIEW OF ACTG FOR...

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