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Unformatted text preview: 19-119ACCOUNTING FOR INCOME TAXES CHAPTER OBJECTIVESAfter careful study of this chapter, students will be able to: 1. Understand permanent and temporary differences. 2. Explain the conceptual issues regarding interperiod tax allocation. 3. Record and report deferred tax liabilities. 4. Record and report deferred tax assets. 5. Explain an operating loss carryback and carryforward. 6. Account for an operating loss carryback. 7. Account for an operating loss carryforward. 8. Apply intraperiod tax allocation. 9. Classify deferred tax liabilities and assets. 19-2SYNOPSISOverview and Definitions1. Significant differences normally exist between pretax financial income and taxable income because generally accepted accounting principles are used to measure pretax financial income while the Internal Revenue Code and state tax laws are used to determine taxable income for purposes of paying income taxes. 2. The differences in income stem from the differences between the objectives of generally accepted accounting principles and those of tax laws. The objective of generally accepted accounting principles is to provide information useful to present and potential users in making rational investment, credit, or similar decisions. However, the objectives of the Internal Revenue Code are to raise revenue to operate the government and to assist the government in achieving social or economic goals. 3. The following terms are critical to understanding the accounting for income taxes: Deferred tax asset- the deferred tax consequences of future deductible amounts and operating loss carryforwards. A deferred tax asset is measured using the applicable enacted tax rate and provisions of the enacted tax law. A deferred tax asset is reduced by a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Deferred tax consequences- the future effects on income taxes, as measured by the applicable enacted tax rate and provisions of the tax law, resulting from temporary differences and operating loss carryforwards at the end of the current year. Deferred tax expense (or benefit) - the change during the year in deferred tax liabilities and assets. Deferred tax liability- The deferred tax consequence of future taxable amounts. A deferred tax liability is measured using the enacted tax rate for the period of recovery or settlement and provisions of the tax law. Future deductible amount- temporary difference that will result in deductible amounts in future years when the related asset or liability is recovered or settled, respectively (also called a “deductible temporary difference”). Future taxable amount- temporary difference that will result in taxable amounts in future years when the related asset or liability is recovered or settled, respectively (also called a “taxable temporary difference”)....
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- Spring '11
- Deferred tax, Taxation in the United States