Course Notes Chapter 19

Course Notes Chapter 19 - Accounting for Income Taxes...

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Chapter 19-1 Accounting for Income Taxes Accounting for Income Taxes Chapter Chapter 19 19
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Chapter 19-2 As you already know: corporations follow GAAP when reporting income. You probably also know that corporations must file income tax returns following the guidelines developed by the Internal Revenue Service (IRS). What if… income according to IRS is different from income according to GAAP (which it is)? Overview Overview
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Chapter 19-3 Since taxes are based on income, tax expense (based on GAAP would not equal taxes payable (based on IRS). So, the j/e would look like: Dr: tax expense (to f/s) xxx Dr/Cr: difference? xyx Cr: taxes payable (to the irs) yyy Questions: 1. What causes these differences (it matters)? 2. Where does the difference go? Overview Overview
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Chapter 19-4 1. The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes. 2. A landlord collects some rents in advance. Rents received are taxable in the period when they are received. 3. Expenses are incurred in obtaining tax-exempt income. 4. Costs of guarantees and warranties are estimated and accrued for financial reporting purposes. What Causes IRS GAAP What Causes IRS GAAP Examples of items that can cause differences between GAAP and IRS:
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Chapter 19-5 What Causes IRS GAAP What Causes IRS GAAP 5. Proceeds are received from a life insurance company because of the death of a key officer (the company carries a policy on key officers). 6. Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled. 7. Sales of investments are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes. 8. Municipal bond interest (tax exempt income).
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Chapter 19-6 Example: Assume the company reports revenue in 2017, 2018, and 2019 of $130,000, respectively. The revenue is reported the same for both GAAP and tax purposes. For simplification, assume the company reports one expense, depreciation, over the three years applying the straight-line method for financial reporting purposes (GAAP) and MACRS (IRS) for the tax return. What is the effect on the accounts of using the two different depreciation methods? What Causes IRS GAAP What Causes IRS GAAP
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Chapter 19-7 Revenues Expenses (S/L depreciation) Pretax financial income Income tax expense (40%) $130,000 30,000 $100,000 $40,000 $130,000 2018 30,000 $100,000 $40,000 $130,000 2019 30,000 $100,000 $40,000 $390,000 Total 90,000 $300,000 $120,000 GAAP Reporting GAAP Reporting Revenues Expenses (MACRS depreciation) Pretax financial income Income tax payable (40%) $130,000 2017 40,000 $90,000 $36,000 $130,000 2018 30,000 $100,000 $40,000 $130,000 2019 20,000 $110,000 $44,000 $390,000 Total 90,000 $300,000 $120,000 Tax Reporting 2017 What Causes IRS GAAP What Causes IRS GAAP
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Chapter 19-8 Income tax expense (GAAP)
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This note was uploaded on 08/22/2011 for the course ACIS 3116 taught by Professor Staff during the Spring '11 term at Virginia Tech.

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Course Notes Chapter 19 - Accounting for Income Taxes...

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