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Chapter 12 - Solution Manual

Based solely on the earnings before extraordinary

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based solely on the earnings before extraordinary items to prevent distortion of the results of continuing operations. The extraordinary items are shown net of the corresponding income tax consequences. Any prior-period adjustment is shown net of the corresponding income tax consequences as an adjustment to beginning retained earnings. b. Some accountants cite the argument that income taxes are an expense rather than a distribution of earnings. They apply the matching concept of accrual accounting, thus relating the income taxes presented on the earnings statement to the earnings that gave rise to those taxes. Their argument is that income tax expense for financial reporting should be related to the respective pretax accounting earnings. Implicit in this argument is the notion that a distribution of earnings is not allocated to periods. c. Under the guidance contained at FASB ASC 740 (original pronouncement SFAS No. 109), deferred tax accounts reflect deferred, future tax consequences. The tax consequences of temporary differences between taxable income and pretax accounting income that will result in future taxable income greater than future pretax accounting income (future taxable amounts) represent the deferral of tax payments and are considered liabilities. The tax consequences of temporary differences between taxable income and pretax accounting income that will result in
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258 future taxable income less than future pretax accounting income (future deductible amounts) represent future benefits and are therefore considered assets. In addition, NOL carryovers and unused tax credits embody future tax benefits which are considered assets. The deferred tax assets and liabilities are measured by projecting the future tax consequences and calculating their balance sheet amounts using tax rates that will be in effect in future years based on currently enacted tax law. The deferred tax assets may be reduced by a valuation allowance if it is more likely than not that some or all of their future benefits will not be realized. At the balance sheet date, a determination is made as to whether deferred tax assets (net of their valuation allowance) and deferred tax liabilities are current or noncurrent. Deferred taxes are considered current or noncurrent based on whether the related balance sheet accounts are classified as current or noncurrent. For example, a deferred tax liability would be classified as noncurrent if it results from a temporary difference in depreciation because the related net plant asset is classified as noncurrent. If there is no related balance sheet account, the determination is made based on whether reversal is expected to occur within the operating cycle or one year, whichever is longer.
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