Chapter 12 - Solution Manual

This difference will reverse in some later period b

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also caused by management decisions regarding the timing of tax payments. This difference will reverse in some later period. b. Examples of temporary differences contained at FASB ASC 740-10-25-20 (original pronouncement SFAS No. 109) include: 1. Revenues or gains that are taxable after they are recognized in financial accounting income. 2. Expenses or losses that are deductible after they are recognized in financial accounting income. 3. Revenues or gains that are taxable before they are recognized in financial accounting income. 4. Expenses or losses that are deductible before they are recognized in financial accounting income. 5. A reduction in the tax basis of depreciable assets because of tax credits. 6. The investment tax credit accounted for by the deferred method. 7. Foreign operations for which the reporting currency is the functional currency. 8. An increase in the tax basis of assets because of indexing for inflation. 9. Business combinations accounted for by the purchase method. c. SFAS No. 109 defends interperiod tax allocation on the basis that temporary differences have future tax consequences. They therefore result in deferred tax assets and deferred tax liabilities. The recognition of deferred tax assets and liabilities affects the amount reported for income tax expense. This effect is consistent with the definition of earnings as changes in net assets attributable to nonowner events and transactions. Interperiod tax allocation can also be defended as being consistent with the matching concept, even in the context of SFAS No. 109. If the future tax consequences argument holds, the effect of applying SFAS No. 109 is to match in the current accounting period, the expected, deferred tax consequences of transactions and events reported in the income statement with their future
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260 tax consequences measured at the tax rate expected to occur when the reversal is expected to take place, given currently enacted tax law. Changes in tax rates in future periods due to changes in tax law are treated as changes in estimate in a manner consistent with other balance sheet and income statement items. Case 12-5 a. Under the provisions of SFAS No. 109, the criteria for recognizing a deferred tax liability specify that a temporary difference has future tax consequences resulting in a liability when the reversal is a future taxable amount. If so, according to SFAS No. 109, the resulting deferred tax consequences meet the definition of liabilities found in SFAC No. 6. That is, the deferred taxes obligate the entity to pay future taxes in excess of the amount that would be paid if there were no reversal, and the obligation results from a prior transaction or event, the occurrence of the temporary difference. The criteria for recognizing a deferred tax asset specify that a temporary difference has future tax consequences resulting in an asset when the reversal is a future deductible amount. Also, a NOL carryforward and unused tax credits have future benefit and are considered assets.
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