chapter19 - ABOUT THIS CHAPTER Accounting for Income Taxes...

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Slide 19-1 Bob Anderson- UCSB Accounting for Income Taxes Chapter 19 Slide 19-2 Bob Anderson- UCSB ABOUT THIS CHAPTER! BE ALERT! WE ARE GOING TO BE BUSY AND MOVING FAST. THIS IS NOT THEORY AND IS BEST TAUGHT WITH A LOT OF EXAMPLES. YOUR BRAIN WILL STRAIN BUT KEEP WITH ME, IT WILL BE WORTH IT! Slide 19-3 Bob Anderson- UCSB The jist of it GAAP income is not always the same as tax. Accordingly there is a difference between the amount of “net income” in the financial statements and “taxable income” in the tax return. These items usually “reverse” over time. Until they reverse an asset or liability must be recorded on the financial statements in order for the tax entries to balance. The balance sheet account used to do this is called deferred tax asset/ liability. This is called the “balance sheet” approach and is required by FAS 109. Slide 19-4 Bob Anderson- UCSB Quick & simple illustration CORPORATE TAX RATE: 35% BOOK/ GAAP TAX/ IRC DIFFERENCE Sales 100,000 100,000 - COS 75,000 75,000 - SG&A 8,000 8,000 - Depreciation 10,000 12,000 (2,000) INCOME BEFORE INCOME TAX 7,000 5,000 2,000 Income tax rate 35% 35% 35% Income tax provision have to solve 1,750 700 NET INCOME need to know tax provision N/A N/A The depreciation difference will "reverse" over time, but we need to do something about it right now! Since this is a balance sheet approach, we first find the balance sheet amounts then solve for the tax expense to record. We are getting more of a deduction for dep. than we expense (this year) for GAAP. This creates a deferred tax liability because we will be recording more expense in the future. We compute the deferred tax asset as follows: Book/Tax difference 2,000 Effective rate 35% DEFERRED TAX ASSET 700 We owe Uncle Sam 1,750 ENTRY: Deferred tax liability 700 Income tax payable 1,750 Income tax provision 2,450 NOTE that the income tax expense of $2,450, which was a plug for us, works out to be 35% of the GAAP income before income tax!! For those math folks out there, this is because the income tax rate used for computing the "deferreds" is 35% and is the same as that used in computing the tax amount owed (consequently ends up with the same effective tax rate). PS Good way to check your computation is to look at the end of it all and see if the effective tax rate you come up with makes sense! Liability Liability
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Slide 19-5 Bob Anderson- UCSB Book vs. Tax Difference Revenues Expenses (S/L depreciation) Pretax financial income Income tax expense (40%) $130,000 30,000 $100,000 $40,000 $130,000 2001 30,000 $100,000 $40,000 $130,000 2002 30,000 $100,000 $40,000 $390,000 Total 90,000 $300,000 $120,000 GAAP Reporting Revenues Expenses (MACRS depreciation) Pretax financial income Income tax payable (40%) $130,000 2000 40,000 $90,000 $36,000 $130,000 2001 30,000 $100,000 $40,000 $130,000 2002 20,000 $110,000 $44,000 $390,000 Total 90,000 $300,000 $120,000 Tax Reporting 2000 Slide 19-6 Bob Anderson- UCSB Book vs. Tax Difference Income tax expense (GAAP) Income tax payable (IRS) Difference $40,000 36,000 $4,000 $40,000 2001 40,000 $0 $40,000 2002 44,000 $(4,000) $120,000 Total 120,000 $0 Comparison 2000 Are the differences accounted for in the financial statements?
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