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COMPUTING INCOME TAX EXPENSE

COMPUTING INCOME TAX EXPENSE. A SIX STEP PROGRAM. STEP 1. IDENTIFY TEMPORARY DIFFERENCES IDENTIFY PERMANENT DIFFERENCES. STEP 2. COMPUTE TAXES PAYABLE DETERMINE GAAP BASED INCOME BEFORE TAXES ADD/SUBTRACT PERMANENT DIFFERENCES

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COMPUTING INCOME TAX EXPENSE

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  1. COMPUTING INCOME TAX EXPENSE A SIX STEP PROGRAM

  2. STEP 1 • IDENTIFY TEMPORARY DIFFERENCES • IDENTIFY PERMANENT DIFFERENCES

  3. STEP 2 • COMPUTE TAXES PAYABLE • DETERMINE GAAP BASED INCOME BEFORE TAXES • ADD/SUBTRACT PERMANENT DIFFERENCES • ADD/SUBTRACT NET ORIGINATING AND/OR REVERSING TEMPORARY DIFFERENCES FOR THE CURRENT PERIOD • APPLY APPROPRIATE RATE/CREDITS • TAXES PAYABLE=CURRENT PORTION

  4. STEP 3 • QUANTIFY UNREVERSED TEMPORARY DIFFERENCES • COMPUTE BOOK VALUE OF RELATED ASSETS/LIABILITIES • COMPUTE TAX BASIS OF RELATED ASSETS/LIABILITIES • SUBTRACT TAX BASIS FROM BOOK VALUE

  5. STEP 4 • CLASSIFY REVERSING DIFFERENCES • TAXABLE • WHEN REVERSED-TAXABLE INCOME IS GREATER THAN GAAP INCOME • DEDUCTIBLE • WHEN REVERSED-TAXABLE INCOME IS LESS THAN GAAP INCOME • DETERMINE BALANCE SHEET CLASSIFICATION

  6. STEP 5 • COMPUTE INCOME TAX EFFECT OF REVERSING DIFFERENCE • USE ENACTED TAX RATES • TAXABLE DIFFERENCES CREATE DEFERRED TAX LIABILITIES • DEDUCTIBLE DIFFERENCES CREATE DEFERRED TAX ASSETS • CONSIDER NEED FOR VALUATION ALLOWANCE • APPLY “MORE LIKELY THAN NOT” TEST

  7. STEP 6 • PREPARE ADJUSTING JOURNAL ENTRY • RECORD INCREASE/DECREASE IN DEFERRED TAX ASSETS/LIABILITIES • RECORD DEFERRED TAX EXPENSE (PLUG) • RECORD CURRENT TAX EXPENSE (TAXES PAYABLE)

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