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Accounting for Income Taxes

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Accounting for Income Taxes

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    1. Accounting for Income Taxes CHAPTER 16

    2. Deferred Tax Assets/Liabilities

    3. Deferred Tax Assets/Liabilities Example

    4. Deferred Tax Assets/Liabilities Example

    5. Deferred Tax Assets/Liabilities Example

    6. Deferred Tax Assets/Liabilities Example

    7. Deferred Tax Assets/Liabilities Example

    8. Deferred Tax Assets/Liabilities Example

    9. Deferred Tax Assets/Liabilities Example

    10. Temporary Differences

    11. Temporary Differences

    13. Temporary Differences Example Wood Temp Services reported pretax income of $100 million each year from 2000 to 2003. In 2000, an asset was acquired for $100 million. It was depreciated for financial statement purposes over 4 years using straight line depreciation. For tax purposes, 3-year class life for MACRS was used.

    14. Temporary Differences Example To determine taxable income, add back financial statement depreciation and deduct MACRS charges.

    15. Temporary Differences Example For 2000, future depreciation for accounting income ($75) > future depreciation for taxable income ($67) by $8. The deferred tax liability for 2000 = The difference is due to depreciation, so the difference is fully recoverable in the future.

    16. Temporary Differences Example

    17. Temporary Differences Example For 2001, future depreciation for accounting income ($50) > future depreciation for taxable income ($23) by $27. The deferred tax liability =

    18. Temporary Differences Example Since the balance in the deferred liability account currently = $3.2, the entry in 2001 will require a credit to the deferred liability of $7.6.

    19. Temporary Differences Example For 2002, future depreciation for accounting income ($25) > future depreciation for taxable income ($8) by $17. The deferred tax liability =

    20. Temporary Differences Example Since the balance in the deferred liability currently = $10.8, the entry in 2002 will require a debit to the deferred liability of $4.0.

    21. Temporary Differences Example In 2003, there is no future deductible amount for accounting income or for taxable income. We reverse out the remaining deferred liability.

    22. Sharpen Your Pencil . . . There Is Still More!!

    23. Valuation Allowance A valuation allowance account is required when it is more likely than not that some portion of the deferred tax asset will not be realized. The deferred tax asset is then reported at its net realizable value.

    24. Non-Temporary Differences Created when an income item is included in taxable income or accounting income but will never be included in the computation of the other. Example: Interest on tax-free municipal bonds is included in accounting income but is excluded from taxable income.

    25. Tax Rate Considerations Deferred tax assets and liabilities should be determined using the future tax rates, if known. The deferred tax asset or liability must be adjusted if a change in a tax law or rate occurs.

    26. Net Operating Losses (NOL)

    27. Carryback and Carryforward

    28. Net Operating Losses (NOL) Example The schedule on the following slide provides information concerning Rental USAs previous taxable income and future estimated taxable income. Rental USA had an NOL of $65,000 in 2000. What is Rental USAs total tax savings if they first carry the NOL back?

    29. Net Operating Losses (NOL) Example

    30. Net Operating Losses (NOL) Example

    31. Disclose the following: Total of all deferred tax liabilities and assets. Total valuation allowance recognized. Net change in valuation account. Approximate tax effect of each type of temporary difference (and carryforward). Balance Sheet Classification

    32. Current portion of tax expense (benefit) Deferred portion of tax expense (benefit), with separate disclosure for Portion that does not include the effect of the following separately disclosed amounts. Operating loss carryforwards. Adjustments due to changes in tax laws or rates. Adjustments to the beginning-of-the-year valuation allowance due to revised estimates. Investment tax credits. Additional Disclosures

    33. Accounting Principle Changes and Error Corrections

    34. Intraperiod Tax Allocation SFAS No. 109 requires intraperiod tax allocation for: Income from continuing operations. Discontinued operations. Extraordinary items. Certain accounting changes. Prior period adjustments.

    35. End of Chapter 16

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