Chapter 19-2 C H A P T E R 19 ACCOUNTING FOR INCOME TAXES
Intermediate Accounting 13th Edition Kieso, Weygandt, and
Warfield
Slide 3
Chapter 19-3 1. 1.Identify differences between pretax financial
income and taxable income. 2. 2.Describe a temporary difference
that results in future taxable amounts. 3. 3.Describe a temporary
difference that results in future deductible amounts. 4. 4.Explain
the purpose of a deferred tax asset valuation allowance. 5.
5.Describe the presentation of income tax expense in the income
statement. 6. 6.Describe various temporary and permanent
differences. 7. 7.Explain the effect of various tax rates and tax
rate changes on deferred income taxes. 8. 8.Apply accounting
procedures for a loss carryback and a loss carryforward. 9.
9.Describe the presentation of deferred income taxes in financial
statements. 10. 10.Indicate the basic principles of the
asset-liability method. Learning Objectives
Slide 4
Chapter 19-4 Fundamentals of Accounting for Income Taxes Future
taxable amounts and deferred taxes Future deductible amounts and
deferred taxes Income statement presentation Specific differences
Rate considerations Accounting for Net Operating Losses Financial
Statement Presentation Review of Asset- Liability Method Loss
carryback Loss carryforward Loss carryback example Loss
carryforward example Balance sheet Income statement Uncertain tax
positions Accounting for Income Taxes
Slide 5
Chapter 19-5 Corporations must file income tax returns
following the guidelines developed by the Internal Revenue Service
(IRS), thus they: LO 1 Identify differences between pretax
financial income and taxable income. Fundamentals of Accounting for
Income Taxes calculate taxes payable based upon IRS code, calculate
income tax expense based upon GAAP. Amount reported as tax expense
will often differ from the amount of taxes payable to the IRS.
Slide 6
Chapter 19-6 Tax Code Exchanges Investors and Creditors
Financial Statements Pretax Financial Income GAAP Income Tax
Expense Taxable Income Income Tax Payable Tax Return vs.
Fundamentals of Accounting for Income Taxes LO 1 Identify
differences between pretax financial income and taxable income.
Illustration 19-1
Slide 7
Chapter 19-7 Illustration: KRC, Inc. reported revenues of
$130,000 and expenses of $60,000 in each of its first three years
of operations. For tax purposes, KRC reported the same expenses to
the IRS in each of the years. KRC reported taxable revenues of
$100,000 in 2010, $150,000 in 2011, and $140,000 in 2012. What is
the effect on the accounts of reporting different amounts of
revenue for GAAP versus tax? LO 1 Identify differences between
pretax financial income and taxable income. Fundamentals of
Accounting for Income Taxes
Slide 8
Chapter 19-8 Revenues Expenses Pretax financial income Income
tax expense (40%) $130,000 60,000 $70,000 $28,000 $130,000 2011
60,000 $70,000 $28,000 $130,000 2012 60,000 $70,000 $28,000
$390,000 Total 180,000 $210,000 $84,000 GAAP Reporting Revenues
Expenses Pretax financial income Income tax payable (40%) $100,000
2010 60,000 $40,000 $16,000 $150,000 2011 60,000 $90,000 $36,000
$140,000 2012 60,000 $80,000 $32,000 $390,000 Total 180,000
$210,000 $84,000 Tax Reporting 2010 LO 1 Identify differences
between pretax financial income and taxable income. Book vs. Tax
Difference Illustration 19-2 Illustration 19-3
Slide 9
Chapter 19-9 Income tax expense (GAAP) Income tax payable (IRS)
Difference $28,000 16,000 $12,000 $28,000 2011 36,000 $(8,000)
$28,000 2012 32,000 $(4,000) $84,000 Total 84,000 $0
ComparisonComparison 2010 Are the differences accounted for in the
financial statements? YearReporting Requirement 2010 2011 2012
Deferred tax liability account increased to $12,000 Deferred tax
liability account reduced by $8,000 Deferred tax liability account
reduced by $4,000 Yes LO 1 Identify differences between pretax
financial income and taxable income. Book vs. Tax Difference
Illustration 19-4
Slide 10
Chapter 19-10 Balance Sheet Assets: Liabilities: Equity: Income
tax expense 28,000 Income Statement Revenues: Expenses: Net income
(loss) 2010 Deferred taxes 12,000 Where does the deferred tax
liability get reported in the financial statements? Income tax
payable16,000 LO 1 Identify differences between pretax financial
income and taxable income. Financial Reporting for 2010
Slide 11
Chapter 19-11 A Temporary Difference is the difference between
the tax basis of an asset or liability and its reported (carrying
or book) amount in the financial statements that will result in
taxable amounts or deductible amounts in future years. Future
Taxable Amounts Future Deductible Amounts Deferred Tax Liability
represents the increase in taxes payable in future years as a
result of taxable temporary differences existing at the end of the
current year. Deferred Tax Asset represents the increase in taxes
refundable (or saved) in future years as a result of deductible
temporary differences existing at the end of the current year.
Illustration 19-22 Examples of Temporary Differences LO 2 Describe
a temporary difference that results in future taxable amounts.
Temporary Differences
Slide 12
Chapter 19-12 LO 2 Describe a temporary difference that results
in future taxable amounts. Future Taxable Amounts and Deferred
Taxes Illustration: In KRCs situation, the only difference between
the book basis and tax basis of the assets and liabilities relates
to accounts receivable that arose from revenue recognized for book
purposes. KRC reports accounts receivable at $30,000 in the
December 31, 2010, GAAP-basis balance sheet. However, the
receivables have a zero tax basis. Illustration 19-5
Slide 13
Chapter 19-13 LO 2 Describe a temporary difference that results
in future taxable amounts. Future Taxable Amounts and Deferred
Taxes KRC assumes that it will collect the accounts receivable and
report the $30,000 collection as taxable revenues in future tax
returns. KRC does this by recording a deferred tax liability.
Illustration 19-6 Illustration: Reversal of Temporary Difference,
KRC Inc.
Slide 14
Chapter 19-14 LO 2 Describe a temporary difference that results
in future taxable amounts. Future Taxable Amounts and Deferred
Taxes A deferred tax liability represents the increase in taxes
payable in future years as a result of taxable temporary
differences existing at the end of the current year. Deferred Tax
Liability Income tax expense (GAAP) Income tax payable (IRS)
Difference $28,000 16,000 $12,000 $28,000 2011 36,000 $(8,000)
$28,000 2012 32,000 $(4,000) $84,000 Total 84,000 $0 2010
Illustration 19-4
Slide 15
Chapter 19-15 LO 2 Describe a temporary difference that results
in future taxable amounts. Future Taxable Amounts and Deferred
Taxes Illustration: Because it is the first year of operations for
KRC, there is no deferred tax liability at the beginning of the
year. KRC computes the income tax expense for 2010 as follows:
Deferred Tax Liability Illustration 19-9
Slide 16
Chapter 19-16 LO 2 Describe a temporary difference that results
in future taxable amounts. Future Taxable Amounts and Deferred
Taxes Illustration: KRC makes the following entry at the end of
2010 to record income taxes. Deferred Tax Liability Income Tax
Expense 28,000 Income Tax Payable 16,000 Deferred Tax Liability
12,000
Slide 17
Chapter 19-17 LO 2 Describe a temporary difference that results
in future taxable amounts. Future Taxable Amounts and Deferred
Taxes Illustration: Computation of Income Tax Expense for 2011.
Deferred Tax Liability Illustration 19-10
Slide 18
Chapter 19-18 LO 2 Describe a temporary difference that results
in future taxable amounts. Future Taxable Amounts and Deferred
Taxes Illustration: KRC makes the following entry at the end of
2011 to record income taxes. Deferred Tax Liability Income Tax
Expense 28,000 Deferred Tax Liability 8,000 Income Tax Payable
36,000
Slide 19
Chapter 19-19 LO 2 Describe a temporary difference that results
in future taxable amounts. Future Taxable Amounts and Deferred
Taxes Illustration: The entry to record income taxes at the end of
2012 reduces the Deferred Tax Liability by $4,000. The Deferred Tax
Liability account appears as follows at the end of 2012. Deferred
Tax Liability Illustration 19-11
Slide 20
Chapter 19-20 E19-1: E19-1: Starfleet Corporation has one
temporary difference at the end of 2010 that will reverse and cause
taxable amounts of $55,000 in 2011, $60,000 in 2012, and $75,000 in
2013. Starfleets pretax financial income for 2010 is $400,000, and
the tax rate is 30% for all years. There are no deferred taxes at
the beginning of 2010.Instructions a) a)Compute taxable income and
income taxes payable for 2010. b) b)Prepare the journal entry to
record income tax expense, deferred income taxes, and income taxes
payable for 2010. LO 2 Describe a temporary difference that results
in future taxable amounts. Future Taxable Amounts and Deferred
Taxes
Slide 21
Chapter 19-21 LO 2 Describe a temporary difference that results
in future taxable amounts. a. a. Future Taxable Amounts and
Deferred Taxes
Slide 22
Chapter 19-22 Future Deductible Amounts and Deferred Taxes
Illustration: During 2010, Cunningham Inc. estimated its warranty
costs related to the sale of microwave ovens to be $500,000, paid
evenly over the next two years. For book purposes, in 2010
Cunningham reported warranty expense and a related estimated
liability for warranties of $500,000 in its financial statements.
For tax purposes, the warranty tax deduction is not allowed until
paid. Illustration 19-12 LO 3 Describe a temporary difference that
results in future deductible amounts.
Slide 23
Chapter 19-23 When Cunningham pays the warranty liability, it
reports an expense (deductible amount) for tax purposes. Cunningham
reports this future tax benefit in the December 31, 2010, balance
sheet as a deferred tax asset. Illustration 19-13 Illustration:
Reversal of Temporary Difference, Cunningham Inc. LO 3 Describe a
temporary difference that results in future deductible amounts.
Future Deductible Amounts and Deferred Taxes
Slide 24
Chapter 19-24 A deferred tax asset represents the increase in
taxes refundable (or saved) in future years as a result of
deductible temporary differences existing at the end of the current
year. Deferred Tax Asset LO 3 Describe a temporary difference that
results in future deductible amounts. Future Deductible Amounts and
Deferred Taxes
Slide 25
Chapter 19-25 Illustration: Hunt Co. accrues a loss and a
related liability of $50,000 in 2010 for financial reporting
purposes because of pending litigation. Hunt cannot deduct this
amount for tax purposes until the period it pays the liability,
expected in 2011. Deferred Tax Asset LO 3 Describe a temporary
difference that results in future deductible amounts. Illustration
19-14 Future Deductible Amounts and Deferred Taxes
Slide 26
Chapter 19-26 Illustration: Assuming that 2010 is Hunts first
year of operations, and income tax payable is $100,000, Hunt
computes its income tax expense as follows. Deferred Tax Asset LO 3
Describe a temporary difference that results in future deductible
amounts. Illustration 19-16 Future Deductible Amounts and Deferred
Taxes
Slide 27
Chapter 19-27 Illustration: Hunt makes the following entry at
the end of 2010 to record income taxes. Deferred Tax Asset Income
Tax Expense 80,000 Deferred Tax Asset20,000 Income Tax Payable
100,000 Future Deductible Amounts and Deferred Taxes LO 3 Describe
a temporary difference that results in future deductible
amounts.
Slide 28
Chapter 19-28 Illustration: Computation of Income Tax Expense
for 2011. Deferred Tax Asset Illustration 19-17 Future Deductible
Amounts and Deferred Taxes LO 3 Describe a temporary difference
that results in future deductible amounts.
Slide 29
Chapter 19-29 Illustration: Hunt makes the following entry at
the end of 2011 to record income taxes. Deferred Tax Asset Income
Tax Expense 160,000 Deferred Tax Asset20,000 Income Tax Payable
140,000 Future Deductible Amounts and Deferred Taxes LO 3 Describe
a temporary difference that results in future deductible
amounts.
Slide 30
Chapter 19-30 Illustration: The entry to record income taxes at
the end of 2011 reduces the Deferred Tax Asset by $20,000.
Illustration 19-18 Deferred Tax Asset Future Deductible Amounts and
Deferred Taxes LO 3 Describe a temporary difference that results in
future deductible amounts.
Slide 31
Chapter 19-31 Illustration: Columbia Corporation has one
temporary difference at the end of 2010 that will reverse and cause
deductible amounts of $50,000 in 2011, $65,000 in 2012, and $40,000
in 2013. Columbias pretax financial income for 2010 is $200,000 and
the tax rate is 34% for all years. There are no deferred taxes at
the beginning of 2010. Columbia expects to be profitable in the
future. Instructions a) a)Compute taxable income and income taxes
payable for 2010. b) b)Prepare the journal entry to record income
tax expense, deferred income taxes, and income taxes payable for
2010. LO 3 Describe a temporary difference that results in future
deductible amounts. Future Deductible Amounts and Deferred
Taxes
Slide 32
Chapter 19-32 LO 3 Describe a temporary difference that results
in future deductible amounts. a. a. Future Deductible Amounts and
Deferred Taxes
Slide 33
Chapter 19-33 Deferred Tax AssetValuation Allowance A company
should reduce a deferred tax asset by a valuation allowance if it
is more likely than not that it will not realize some portion or
all of the deferred tax asset. More likely than not means a level
of likelihood of at least slightly more than 50 percent. LO 4
Explain the purpose of a deferred tax asset valuation allowance.
Future Deductible Amounts and Deferred Taxes
Slide 34
Chapter 19-34 E19-14: Callaway Corp. has a deferred tax asset
balance of $150,000 at the end of 2010 due to a single cumulative
temporary difference of $375,000. At the end of 2011 this same
temporary difference has increased to a cumulative amount of
$500,000. Taxable income for 2011 is $850,000. The tax rate is 40%
for all years. No valuation account is in existence at the end of
2010. Instructions Assuming that it is more likely than not that
$30,000 of the deferred tax asset will not be realized, prepare the
journal entries required for 2011. LO 4 Explain the purpose of a
deferred tax asset valuation allowance. Future Deductible Amounts
and Deferred Taxes
Slide 35
Chapter 19-35 LO 4 Explain the purpose of a deferred tax asset
valuation allowance. Future Deductible Amounts and Deferred
Taxes
Slide 36
Chapter 19-36 Deferred Tax AssetValuation Allowance E19-14
Balance Sheet Presentation LO 4 Explain the purpose of a deferred
tax asset valuation allowance. Future Deductible Amounts and
Deferred Taxes
Slide 37
Chapter 19-37 Income tax payable or refundable LO 5 Describe
the presentation of income tax expense in the income statement.
Income Statement Presentation Change in deferred income tax Income
tax expense or benefit +-+-+-+- = In the income statement or in the
notes to the financial statements, a company should disclose the
significant components of income tax expense (current and
deferred). Formula to Compute Income Tax Expense Illustration
19-20
Slide 38
Chapter 19-38 LO 5 Describe the presentation of income tax
expense in the income statement. Income Statement Presentation
Given the previous information related to KRC Inc., KRC reports its
income statement as follows. Illustration 19-21
Slide 39
Chapter 19-39 Taxable temporary differences - Deferred tax
liability Deductible temporary differences - Deferred tax Asset
Temporary Differences Specific Differences Text Illustration 19-22
Examples of Temporary Differences LO 6 Describe various temporary
and permanent differences.
Slide 40
Chapter 19-40 Permanent differences are caused by items that
(1) enter into pretax financial income but never into taxable
income or (2) enter into taxable income but never into pretax
financial income. Permanent differences affect only the period in
which they occur, they do not give rise to future taxable or
deductible amounts. There are no deferred tax consequences to be
recognized. Text Illustration 19-24 Examples of Permanent
Differences Specific Differences LO 6 Describe various temporary
and permanent differences.
Slide 41
Chapter 19-41 Do the following generate: Future Deductible
Amount = Deferred Tax Asset Future Deductible Amount = Deferred Tax
Asset Future Taxable Amount = Deferred Tax Liability Future Taxable
Amount = Deferred Tax Liability A Permanent Difference A Permanent
Difference 1. The MACRS depreciation system is used for tax
purposes, and the straight-line depreciation method is used for
financial reporting purposes. Future Taxable Amount 2. A landlord
collects some rents in advance. Rents received are taxable in the
period when they are received. Future Deductible Amount 3. Expenses
are incurred in obtaining tax-exempt income. Permanent Difference
4. Costs of guarantees and warranties are estimated and accrued for
financial reporting purposes. Future Deductible Amount Specific
Differences LO 6 Describe various temporary and permanent
differences.
Slide 42
Chapter 19-42 Do the following generate: Future Deductible
Amount = Deferred Tax Asset Future Deductible Amount = Deferred Tax
Asset Future Taxable Amount = Deferred Tax Liability Future Taxable
Amount = Deferred Tax Liability A Permanent Difference A Permanent
Difference 5. Sales of investments are accounted for by the accrual
method for financial reporting purposes and the installment method
for tax purposes. Future Taxable Amount 6. Proceeds are received
from a life insurance company because of the death of a key officer
(the company carries a policy on key officers). Future Deductible
Amount 7. Estimated losses on pending lawsuits and claims are
accrued for books. These losses are tax deductible in the period(s)
when the related liabilities are settled.. A Permanent Difference
Specific Differences LO 6 Describe various temporary and permanent
differences.
Slide 43
Chapter 19-43 Permanent Differences LO 6 Describe various
temporary and permanent differences. E19-4: Havaci Company reports
pretax financial income of $80,000 for 2010. The following items
cause taxable income to be different than pretax financial income.
1. 1.Depreciation on the tax return is greater than depreciation on
the income statement by $16,000. 2. 2.Rent collected on the tax
return is greater than rent earned on the income statement by
$27,000. 3. 3.Fines for pollution appear as an expense of $11,000
on the income statement. Havacis tax rate is 30% for all years, and
the company expects to report taxable income in all future years.
There are no deferred taxes at the beginning of 2010.
Slide 44
Chapter 19-44 Permanent Differences LO 6 Describe various
temporary and permanent differences.
Slide 45
Chapter 19-45 A company must consider presently enacted changes
in the tax rate that become effective for a particular future
year(s) when determining the tax rate to apply to existing
temporary differences. Revision of Future Tax Rates When a change
in the tax rate is enacted, companies should record its effect on
the existing deferred income tax accounts immediately. Tax Rate
Considerations Specific Differences LO 7 Explain the effect of
various tax rates and tax rate changes on deferred income
taxes.
Slide 46
Chapter 19-46 Net operating loss (NOL) = tax-deductible
expenses exceed taxable revenues. The federal tax laws permit
taxpayers to use the losses of one year to offset the profits of
other years (carryback and carryforward). Accounting for Net
Operating Losses LO 8 Apply accounting procedures for a loss
carryback and a loss carryforward.
Slide 47
Chapter 19-47 Loss Carryback Accounting for Net Operating
Losses LO 8 Apply accounting procedures for a loss carryback and a
loss carryforward. Back 2 years and forward 20 years Losses must be
applied to earliest year first Illustration 19-29
Slide 48
Chapter 19-48 Loss Carryforward May elect to forgo loss
carryback and Carryforward losses 20 years Accounting for Net
Operating Losses LO 8 Apply accounting procedures for a loss
carryback and a loss carryforward. Illustration 19-30
Slide 49
Chapter 19-49 BE19-12: (Carryback) Conlin Corporation had the
following tax information. Accounting for Net Operating Losses LO 8
Apply accounting procedures for a loss carryback and a loss
carryforward. In 2011 Conlin suffered a net operating loss of
$480,000, which it elected to carry back. The 2011 enacted tax rate
is 29%. Prepare Valiss entry to record the effect of the loss
carryback.
Slide 50
Chapter 19-50 Accounting for Net Operating Losses $144,000 LO 8
Apply accounting procedures for a loss carryback and a loss
carryforward.
Slide 51
Chapter 19-51 E19-12: Journal Entry for 2011 Accounting for Net
Operating Losses LO 8 Apply accounting procedures for a loss
carryback and a loss carryforward. Income tax refund receivable
144,000 Benefit due to loss carryback144,000
Slide 52
Chapter 19-52 Accounting for Net Operating Losses LO 8 Apply
accounting procedures for a loss carryback and a loss carryforward.
BE19-13: Rode Inc. incurred a net operating loss of $500,000 in
2010. Combined income for 2008 and 2009 was $350,000. The tax rate
for all years is 40%. Rode elects the carryback option. Prepare the
journal entries to record the benefits of the loss carryback and
the loss carryforward.
Slide 53
Chapter 19-53 Accounting for Net Operating Losses LO 8 Apply
accounting procedures for a loss carryback and a loss
carryforward.
Slide 54
Chapter 19-54 E19-13: Journal Entries for 2010 Accounting for
Net Operating Losses LO 8 Apply accounting procedures for a loss
carryback and a loss carryforward. Income tax refund receivable
140,000 Benefit due to loss carryback140,000 Deferred tax
asset60,000 Benefit due to loss carryforward60,000
Slide 55
Chapter 19-55 BE19-14 (Carryback and Carryforward with
Valuation Allowance): Use the information for Rode Inc. given in
BE19-13. Assume that it is more likely than not that the entire net
operating loss carryforward will not be realized in future years.
Prepare all the journal entries necessary at the end of 2010.
Accounting for Net Operating Losses LO 8 Apply accounting
procedures for a loss carryback and a loss carryforward.
Slide 56
Chapter 19-56 E19-14: Journal Entries for 2010 Accounting for
Net Operating Losses LO 8 Apply accounting procedures for a loss
carryback and a loss carryforward.
Slide 57
Chapter 19-57 Whether the company will realize a deferred tax
asset depends on whether sufficient taxable income exists or will
exist within the carryforward period. Valuation Allowance Revisited
LO 8 Apply accounting procedures for a loss carryback and a loss
carryforward. Text Illustration 19-37 Possible Sources of Taxable
Income If any one of these sources is sufficient to support a
conclusion that a valuation allowance is unnecessary, a company
need not consider other sources. Text Illustration 19-38 Evidence
to Consider in Evaluating the need for a Valuation Account
Slide 58
Chapter 19-58 Balance Sheet Presentation Financial Statement
Presentation LO 9 Describe the presentation of deferred income
taxes in financial statements. An individual deferred tax liability
or asset is classified as current or noncurrent based on the
classification of the related asset or liability for financial
reporting purposes. Companies should classify deferred tax accounts
on the balance sheet in two categories: one for the net current
amount, and one for the net noncurrent amount.
Slide 59
Chapter 19-59 Income Statement Presentation Financial Statement
Presentation LO 9 Describe the presentation of deferred income
taxes in financial statements. Companies should allocate income tax
expense (or benefit) to continuing operations, discontinued
operations, extraordinary items, and prior period adjustments.
Companies should disclose the significant components of income tax
expense attributable to continuing operations (current tax expense,
deferred tax expense, etc.).
Slide 60
Chapter 19-60 Review of the Asset-Liability Method Companies
apply the following basic principles: (1) (1) Recognize a current
tax liability or asset for the estimated taxes payable or
refundable. (2) (2) Recognize a deferred tax liability or asset for
the estimated future tax effects attributable to temporary
differences and carryforwards using enacted tax rate. (3) (3) Base
the measurement of current and deferred taxes on provisions of the
enacted tax law. (4) (4) Reduce the measurement of deferred tax
assets, if necessary, by the amount of any tax benefits that,
companies do not expect to realize. LO 10 Indicate the basic
principles of the asset-liability method.
Slide 61
Chapter 19-61 Review of the Asset-Liability Method LO 10
Indicate the basic principles of the asset-liability method.
Illustration 19-43 Procedures for Computing and Reporting Deferred
Income Taxes
Slide 62
Chapter 19-62 The classification of deferred taxes under iGAAP
is always noncurrent. Under iGAAP, an affirmative judgment approach
is used, by which a deferred tax asset is recognized up to the
amount that is probable to be realized. U.S. GAAP uses an
impairment approach. iGAAP uses the enacted tax rate or
substantially enacted tax rate. (Substantially enacted means
virtually certain.) For U.S. GAAP, the enacted tax rate must be
used.
Slide 63
Chapter 19-63 The tax effects related to certain items are
reported in equity under iGAAP. That is not the case under U.S.
GAAP, which charges or credits the tax effects to income. U.S. GAAP
requires companies to assess the likelihood of uncertain tax
positions being sustainable upon audit. Potential liabilities must
be accrued and disclosed if the position is more likely than not to
be disallowed. Under iGAAP, all potential liabilities must be
recognized. With respect to measurement, iGAAP uses an
expected-value approach to measure the tax liability, which differs
from U.S. GAAP.
Slide 64
Chapter 19-64 Fiscal Year-2009 Allman Company, which began
operations at the beginning of 2009, produces various products on a
contract basis. Each contract generates a gross profit of $80,000.
Some of Allmans contracts provide for the customer to pay on an
installment basis. Under these contracts, Allman collects one-fifth
of the contract revenue in each of the following four years. For
financial reporting purposes, the company recognizes gross profit
in the year of completion (accrual basis); for tax purposes, Allman
recognizes gross profit in the year cash is collected (installment
basis). LO 11 Understand and apply the concepts and procedures of
interperiod tax allocation.
Slide 65
Chapter 19-65 Fiscal Year-2009 Presented below is information
related to Allmans operations for 2009. 1. 1.In 2009, the company
completed seven contracts that allow for the customer to pay on an
installment basis. Allman recognized the related gross profit of
$560,000 for financial reporting purposes. It reported only
$112,000 of gross profit on installment sales on the 2009 tax
return. The company expects future collections on the related
installment receivables to result in taxable amounts of $112,000 in
each of the next four years. 2. 2.At the beginning of 2009, Allman
Company purchased depreciable assets with a cost of $540,000. For
financial reporting purposes, Allman depreciates these assets using
the straight-line method over a six-year service life. For tax
purposes, the assets fall in the five- year recovery class, and
Allman uses the MACRS system. LO 11
Slide 66
Chapter 19-66 Fiscal Year-2009 LO 11 3. 3.The company warrants
its product for two years from the date of completion of a
contract. During 2009, the product warranty liability accrued for
financial reporting purposes was $200,000, and the amount paid for
the satisfaction of warranty liability was $44,000. Allman expects
to settle the remaining $156,000 by expenditures of $56,000 in 2010
and $100,000 in 2011.
Slide 67
Chapter 19-67 Fiscal Year-2009 LO 11 4. 4.In 2009 nontaxable
municipal bond interest revenue was $28,000. 5. 5.During 2009
nondeductible fines and penalties of $26,000 were paid. 6. 6.Pretax
financial income for 2009 amounts to $412,000. 7. 7.Tax rates
enacted before the end of 2009 were: 2009 50% 2010 and later years
40% 8. 8.The accounting period is the calendar year. 9. 9.The
company is expected to have taxable income in all future
years.
Slide 68
Chapter 19-68 Taxable Income and Income Tax Payable-2009 LO 11
The first step is to determine Allman Companys income tax payable
for 2009 by calculating its taxable income. Illustration 19A-1
Illustration 19A-2
Slide 69
Chapter 19-69 Computing Deferred Income Taxes End of 2009 LO 11
Illustration 19A-3 Illustration 19A-4
Slide 70
Chapter 19-70 Deferred Tax Expense (Benefit) and the Journal
Entry to Record Income Taxes - 2009 LO 11 Illustration 19A-5
Computation of Deferred Tax Expense (Benefit), 2009 Computation of
Net Deferred Tax Expense, 2009 Illustration 19A-6
Slide 71
Chapter 19-71 Deferred Tax Expense (Benefit) and the Journal
Entry to Record Income Taxes - 2009 LO 11 Illustration 19A-7
Computation of Total Income Tax Expense, 2009 Journal Entry for
Income Tax Expense, 2009 Income Tax Expense 174,000 Deferred Tax
Asset 62,400 Income Tax Payable 50,000 Deferred Tax Liability
186,400
Slide 72
Chapter 19-72 Companies should classify deferred tax assets and
liabilities as current and noncurrent on the balance sheet based on
the classifications of related assets and liabilities. Financial
Statement Presentation - 2009 LO 11 Illustration 19A-8
Slide 73
Chapter 19-73 Balance Sheet Presentation of Deferred Taxes,
2009 Financial Statement Presentation - 2009 LO 11 Illustration
19A-9 Illustration 19A-10
Slide 74
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