CASE 19 4 Part A a Deferred income taxes are reported in the financial

Case 19 4 part a a deferred income taxes are reported

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CASE 19-4 Part A. (a) Deferred income taxes are reported in the financial statements when temporary differences exist at the balance sheet date. Deferred taxes are never reported for permanent differences. The tax consequences of most events recognized in the financial statements for a year are included in determining income taxes currently payable. However, tax laws often differ from the recognition and measurement requirements of financial accounting standards, and differences can arise between: (1) the amount of taxable income and pretax financial income for a year and (b) the tax bases of assets or liabilities and their reported amounts in financial statements. An assumption inherent in an enterprise’s statement of financial position prepared in accordance with generally accepted accounting principles is that the reported amounts of assets and liabilities will be recovered and settled, respectively. Based on that assumption, a difference between the tax basis of an asset or a liability and its reported amount in the statement of financial position will result in taxable or deductible amounts in some future year(s) when the reported amounts of assets are recovered and the reported amounts of liabilities are settled. A deferred tax liability is reported for the increase in taxes payable in future years as a result of taxable temporary differences existing at the balance sheet date. A deferred tax asset is reported for the increase in taxes refundable in future years as a result of deductible temporary differences existing at the balance sheet date. The most common temporary differences arise from including revenues or expenses in taxable income in a period later or earlier than the period in which they are included in pretax financial income. (b) 1. Gross profit on installment sales—Deferred income taxes would be recognized when gross profit on installment sales is included in pretax financial income in the year of sale and included in taxable income when later collected. 2. Revenues on long-term construction contracts—Deferred income taxes would be recognized whenever revenues on long-term construction contracts are recognized for financial reporting purposes on the percentage-of-completion basis but deferred for tax purposes.
19-71 CASE 19-4 (Continued) 3. Estimated costs of product warranty contracts—Deferred income taxes should usually be recognized because estimated costs of product warranty contracts should be recognized for financial reporting purposes in the year of sale and reported for tax purposes when paid. 4. Premiums on officers’ life insurance with Davenport as beneficiary—This is a permanent difference and deferred income taxes should not be recognized. Premiums on officers’ life insurance with Davenport as beneficiary should be recognized in Davenport Company’s in- come statement but are not a deductible expense for tax purposes.

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