ACC327_CH19_Notes - Chapter 19 Accounting for Income Taxes...

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Chapter 19 Accounting for Income Taxes 1. The need to account for deferred income taxes arises because GAAP differs from income tax regulations. A. Pretax accounting income for fin. stmt. purposes is determined using GAAP. B. Taxable income for tax return purposes is determined using the rules of the Internal Revenue Code. 1. Thus in a given year, Pretax acctg. income does not equal Taxable income , which means that Income tax expense does not equal Current tax liability (based on acctg. inc.) (based on taxable income) C. What are some examples of differences between GAAP and IRC rules? For fin. stmts. (GAAP) For tax purposes (IRC) Dep. expense Usually straight-line Usually accelerated Warranty exp. Recognized in period incurred Recog. in period paid Revenue recog. Accrual basis (period earned) Installment basis (when cash is received) Investments w/> 20% C/S Equity method (period earned) Cost method (when cash dividend is rec'd) Rev. on trading securities Fair value method (rev./loss Cash basis (gain/loss recognized based on changes recognized when in investment fair value) invest. is sold) Bad debt exp. Usually allowance method (exp. Direct write-off meth. recognized in period of sale) (exp. recognized in period account is written off) And many more! D. The above create temporary differences .
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1. Temporary difference - is the difference between the tax basis of an asset or liability and its reported amount in the fin. stmts. that will result in future taxable amounts (increases in taxable income) or future deductible amounts (decreases in taxable income in years to come when the asset is recovered (used) or the liability is settled. a. Future taxable amounts - in general mean that future taxable income (TI) will be higher than pretax acctg. income. These future taxable amounts are created by two situations. 1. Recognizing expense for tax purposes before recognition for acctg. purposes (e.g., accelerated dep. for tax and SL for acctg.), or 2. Recognizing revenue for tax purposes after recognition for acctg. (book) purposes (e.g., accrual basis sales revenue for books and installment basis for tax). As an example, assume an automobile is purchased on 1/1/yr1 for $10,000 with no salvage value and a four-year life. SL dep. is used for the books but Modified Accelerated Cost Recovery System (MACRS) is used for tax: Books Tax Dep. exp. EOY BV Dep exp. EOY BV Yr 1 $2,500 $7,500 $3,333 $6,667 Yr 2 2,500 5,000 4,445 2,222 Yr 3 2,500 2,500 1,481 741 Yr 4 2,500 0 741 0 $10,000 $10,000 Notice several points: a. The dep. exp. differs each yr. for tax and books but is equal in total over the 4 years. b. The differing dep. exp. between books and tax each yr. causes the asset to have a different basis (book value) each year between books and tax. 1. This difference between the basis of the asset for
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This note was uploaded on 04/10/2011 for the course ACC 327 taught by Professor Sign during the Spring '11 term at S. Alabama.

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ACC327_CH19_Notes - Chapter 19 Accounting for Income Taxes...

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