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Chapter16Notes - ACCT 4050 Accounting for Income Taxes...

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Click to edit Master subtitle style 4/7/11 ACCT 4050 Accounting for Income Taxes Professor Dennis Chambers ACCT 4050
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4/7/11 ACCT 4050 Objectives Understand the concept of deferred taxes and the distinction between permanent and temporary differences. Compute the amount of deferred tax liabilities and assets. Explain the provisions of tax loss carrybacks and carryforwards, and be able to account for these provisions. Schedule future tax rates, and determine the effect on tax assets and liabilities. 22
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4/7/11 ACCT 4050 Permanent Differences Permanent Differences- Nondeductible expenses or nontaxable revenues that are recognized for financial reporting purposes but are never part of taxable income. l No accounting issues related to permanent differences Reported income tax expense reflects exclusion of these items Examples: 33
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4/7/11 ACCT 4050 Temporary Differences Temporary Differences- Differences between pretax financial income and taxable income arising from business events that are recognized for both financial and tax purposes, but in different time periods . Examples: l Depreciation expense l Revenue received in advance 44
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4/7/11 ACCT 4050 How do operating liabilities arise? 55 When we accrue an expense that we haven’t yet paid in cash l Example—Salaries payable We accrue salary expense (debit) and create a liability called salaries payable (credit) We created an obligation this year that we’ll fulfill in a future year . Temporary difference: A tax obligation that will be paid in future years
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4/7/11 ACCT 4050 Deferred Tax Liabilities 66 When we accrue (recognize) income tax expense this period, but pay the taxes in a future period: l This is a “Temporary Difference” l We need a liability to carry that obligation Called: Deferred Tax Liability l Typical journal entry: Income tax expense XXXXX
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4/7/11 ACCT 4050 How do operating assets arise? 77 When we prepay in cash a future obligation that has not yet occurred. l Example—prepaid insurance premiums We pay cash (credit cash) and we debit a pre- paid asset like prepaid insurance. We then use that asset when we are obligated for insurance premiums in the future. Temporary difference: A tax payment that will be used in the future to meet a tax expense that hasn’t occurred yet.
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4/7/11 ACCT 4050 Deferred Tax Assets 88 When the IRS requires more tax payment this year than US GAAP income tax expense for this year. l This is a temporary difference l We need an asset to carry forward that payment until we expense it in the future. l Typical journal entry: Deferred tax asset XXXXX
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4/7/11 ACCT 4050 In-Class Exercise Let’s pause and work in-class exercise #1 99
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4/7/11 ACCT 4050 Simple Example of Deferred Tax Liability USGAAP: 2009 2010 Total Accrued Revenue 35,000 $ - $ 35,000 $ Accrued Income Tax Expense (40% rate) 14,000 $ - $ 14,000 $ Tax Code: Cash Revenue 15,000 20,000 35,000 $ Taxes due to IRS(based on 40% rate) 6,000 8,000 14,000 $ Journal Entries for Taxes in 2009: Income Tax Expense 6,000 Income Taxes Payable 6,000 Income Tax Expense 8,000 Deferred Tax Liability 8,000
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