Acct 4120 Chapter 16 Spiceland 5th edition

Acct 4120 Chapter 16 Spiceland 5th edition - Acct 4120...

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Acct 4120 Chapter 16 Accounting for Income Taxes
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Chapter 16 page 2 Comparison of the two systems:
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Transactions not treated the same because of: Permanent Differences Temporary Differences Future tax impact in deferred income tax $ $$ Chapter 16 page 3
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Permanent differences Caused by differences between tax law and GAAP. Results in a transaction being included in taxable income or GAAP based income that will never be included in the computation of the other. Disregard when determining future tax consequences. Examples: Interest received on municipal bonds Fines and penalties Life insurance proceeds Officer’s compensation that exceeds $1,000,000 Chapter 16 page 4
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Temporary differences Caused by including a transaction in the financial statements in a different accounting period than when it is included in the tax return. Results in a future tax savings or taxable amount. Will need to record deferred income taxes on the company’s balance sheet to estimate the future tax effect. Examples: Depreciation Accrued sales Accrued warranty expense Cash received in advance of providing goods / services Chapter 16 page 5
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Two types of temporary differences Accounting income > taxable income Accounting income < taxable income Future taxable amounts Future deductible amounts Deferred Tax Liability Deferred Tax Asset Caused by: Tax impact: Balance sheet impact: Chapter 16 page 6
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Types of Temporary Differences Chapter 16 page 7 Revenues (or gains) Expenses (or losses) Items reported on the tax return after the income statement Installment sales of property (installment method for taxes). Unrealized gain from recording investments at fair value (taxable when asset is sold). Estimated expenses and losses (tax deductible when paid). Unrealized loss from recording investments at fair value or inventory at LCM (tax deductible when asset is sold).
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