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Chapter 12 - Solution Manual

In the balance sheet current deferred tax assets are

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In the balance sheet, current deferred tax assets are netted against current deferred tax liabilities. A resulting net liability is reported as a single amount as a current liability. A resulting net asset is reported as a single amount as a current asset. Noncurrent deferred tax assets and liabilities are netted and reported in a similar manner as a single noncurrent asset or liability amount. d.i. Temporary difference. The full estimated three years of warranty expenses reduce the current year's pretax accounting earnings, but will reduce taxable income in varying amounts each respective year, as incurred. Assuming the estimate as to each warranty is valid, the total amounts deducted for accounting and for tax purposes will be equal over the three-year period for a given warranty. This is an example of an expense that, in the first period, reduces pretax accounting earnings more than taxable income and, in later years, reverses and reduces taxable income without affecting pretax accounting earnings. ii. Permanent difference. This difference in depreciation for pretax accounting earnings and taxable income will never reverse because the depreciation is based on different recorded amounts of the assets in question. The income tax expense per books would be reflected based on the amount actually paid (or due) in this situation. iii. Temporary difference. The investor's share of earnings of an investee (other than subsidiaries and corporate joint ventures) accounted for by the equity method is included in pretax accounting earnings, while only dividends received are included in taxable income. This difference between pretax accounting earnings and taxable income is assumed to be related either to probable future dividend distributions or to anticipated realization on disposal of the investment and is a factor in determining income tax expense. Future dividends imply ordinary income, and future disposal of an investment implies capital-gains income. Because dividend income is subject to an 85% dividends-received deduction, the effective rate would, in this case, be lower for the ordinary dividend income than for capital gains.
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259 e. Estimated warranty costs (covering a three year period) that are expensed for accounting purposes when incurred result in future deductible amounts because they are not deductible for tax purposes until paid. The resulting tax benefit is a deferred tax asset. Normally equity method income will exceed the taxable portion of dividends received. A reversal would therefore be a taxable amount and would result in a deferred tax liability. Case 12-4 a. The term "temporary differences" is the differences between taxable and financial accounting income that occur either because revenue is recognized in one period for income tax purposes and in a different period for accounting purposes or because expenses are recognized in either an earlier or later period for accounting purposes than for tax purposes. Temporary differences are also caused by management decisions regarding the timing of tax payments. This difference will
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