80%(5)4 out of 5 people found this document helpful
This preview shows page 70 - 72 out of 82 pages.
CASE 19-4Part A.(a)Deferred income taxes are reported in the financial statements when temporary differences existat 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 areincluded in determining income taxes currently payable. However, tax laws often differ from therecognition and measurement requirements of financial accounting standards, and differencescan 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. Anassumption inherent in an enterprise’s statement of financial position prepared in accordancewith generally accepted accounting principles is that the reported amounts of assets andliabilities will be recovered and settled, respectively. Based on that assumption, a differencebetween the tax basis of an asset or a liability and its reported amount in the statement offinancial position will result in taxable or deductible amounts in some future year(s) when thereported 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 oftaxable temporary differences existing at the balance sheet date. A deferred tax asset is reportedfor the increase in taxes refundable in future years as a result of deductible temporary differencesexisting at the balance sheet date. The most common temporary differences arise from includingrevenues or expenses in taxable income in a period later or earlier than the period in which theyare included in pretax financial income.(b)1.Gross profit on installment sales—Deferred income taxes would be recognized when grossprofit on installment sales is included in pretax financial income in the year of sale andincluded in taxable income when later collected.2.Revenues on long-term construction contracts—Deferred income taxes would berecognized whenever revenues on long-term construction contracts are recognized forfinancial reporting purposes on the percentage-of-completion basis but deferred for taxpurposes.
19-71CASE 19-4 (Continued)3.Estimated costs of product warranty contracts—Deferred income taxes should usually berecognized because estimated costs of product warranty contracts should be recognized forfinancial 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 permanentdifference and deferred income taxes should not be recognized. Premiums on officers’ lifeinsurance with Davenport as beneficiary should be recognized in Davenport Company’s in-come statement but are not a deductible expense for tax purposes.