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Unformatted text preview: Chapter 17 - Accounting for Income Taxes Chapter 17 Accounting for Income Taxes SOLUTIONS MANUAL Discussion Questions 1. [LO 1] Identify some of the reasons why accounting for income taxes is complex. Answer: U.S. tax laws are complex and ambiguous. A company often prepares its financial statements (Form 10-K) six months or more in advance of when the company files its corresponding income tax returns. The rules that apply to accounting for income taxes are not found exclusively in ASC 740 (for example, stock options and business combinations). 2. [LO 1] True or False: ASC 740 applies to all taxes paid by a corporation. Explain. Answer: False. ASC 740 only applies to income taxes paid by a corporation. 3. [LO 1]True or False: ASC 740 is the sole source for the rules that apply to accounting for income taxes. Explain. Answer: False. With the Accounting Standards Codification, the rules that apply to accounting for income taxes are found primarily in ASC 740. The codification includes rules previously found in pronouncements from the Emerging Issues Task Force, opinions from the former Accounting Principles Board, and pronouncements from the Securities and Exchange Commission. ASC 740 does not include the income tax accounting rules that apply to accounting for stock compensation or business combinations. 4. [LO 1] How does the fact that most corporations file their financial statements several months before they file their income tax returns complicate the income tax provision process? Answer: When a corporation files its financial statements in advance of its federal income tax return, management must use judgment to estimate the actual tax liability that will result when the tax return is filed. When the tax return is filed, the corporation must adjust its balance sheet to reflect the actual taxes payable and make any other adjustments to reflect the companys true current and deferred tax liabilities. This adjustment often is referred to as a provision-to-return adjustment. 17-1 Chapter 17 - Accounting for Income Taxes 5. [LO 1] What distinguishes an income tax from other taxes? Answer: The FASB defines an income tax as a tax based on income. This definition excludes property taxes, excise taxes, sales taxes, and value-added taxes, which are assessed based on sales or value. A company reports non-income taxes as expenses in the computation of net income before taxes. 6. [LO 1] Briefly describe the six step process by which a company computes its income tax provision. Answer: The steps to compute a companys federal income tax provision proceed as follows: 1. Adjust pre-tax net income for all permanent differences 2. Identify all temporary differences and tax carryforward amounts 3. Calculate the current income tax expense or benefit (refund) 4. Determine the ending balances in the balance sheet deferred tax asset and liability accounts 5. Evaluate the need for a valuation allowance for gross deferred tax assets...
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- Spring '12