16 - Chapter 16 Accounting for Income Taxes 1 Recommended...

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Chapter 16 Accounting for Income Taxes 1
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Recommended problems from the text E16-1, 2, 7, 10, 14, 16, 20 CPA exam questions 1, 2 P16-11 2
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Topics 1. Overview 2. Current income taxes 3. Deferred income tax assets and liabilities 1. Temporary differences 1. Asset value differences book versus tax 2. Liability value differences book versus tax 3. Net operating losses 2. Changes in tax rates—effect on measurement of deferred taxes assets and 3
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Overview The objective of financial accounting is to provide information useful to decision makers. The objective of tax accounting is to…raise taxes, among other things. Since the objectives of financial accounting and tax accounting are different it should come as no surprise that different measurement methods are used to calculate income for book and tax. 4
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Current income taxes Current income taxes payable are a function of current taxable income multiplied by current income tax rates less applicable tax credits 5
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Current income taxes--example Assume The Multi Company operates in two tax jurisdictions. It has book and taxable income equal to $10,000 in the first and $20,000 in the second. The tax rates in the two are Current taxes payable: 1st jurisdiction: $10,000*.3 = $3,000 - $1,200=$1,800 6
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Deferred income tax assets and liabilities--overview Deferred income tax assets and liabilities result from temporary differences between the measurement of an asset or liability for book versus tax purposes for some period of time. The temporary difference in the measurement of assets or liabilities for book vs. tax results in a difference between book and taxable income. Temporary means temporary—eventually things equal out, e.g., the sum of accelerated depreciation expense for tax and straight-line depreciation for book is equal over the life of the asset At the end of the period of time during which a temporary difference existed, the asset and liability that gave rise to the temporary difference will be the same for book and tax, the sum of reported income over the entire period during which the temporary difference existed will be the same, and the balance any related in 7
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Temporary differences and Deferred tax assets and liabilities If income is first higher for book than tax as a result of a temporary difference then a deferred tax liability will be recorded. Deferred taxes are measured as the difference in income between book and tax as a result of a temporary difference multiplied by the future tax rate that you expect to prevail based on current tax law when the temporary difference “reverses” (i.e., if book income is temporarily high 8
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Common causes of Temporary differences Depreciation Revenue Recognition Other post employment benefits (expenses recorded when the obligation 9
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16 - Chapter 16 Accounting for Income Taxes 1 Recommended...

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