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8/17/2019 Intermediate Nbj Ch19
1/77
Accounting for Income
Taxes
Chapter19
An electronic presentation
by Norman Sunderman
Angelo State University
An electronic presentation
by Norman Sunderman
Angelo State University
COPYRIGHT © 2007 Thomson South-Western, a part o The Thomson Corporat!on"Thomson, the Star #o$o, an% South-Western are tra%emar&s use% here!n un%er #!'ense"
Intermediate AccountingIntermediate Accounting 10th edition 10th edition
Nikolai Bazley onesNikolai Bazley ones
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1! Understand permanent and temporary
di""erences!
#! $%plain the conceptual issues
regarding interperiod ta% allocation!
&! 'ecord and report de"erred ta%
liabilities!
(! 'ecord and report de"erred ta% assets!)! $%plain an operating loss carryback
and carry"or*ard!
Objectives
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3
+! Account "or an operating loss carryback!
,! Account "or an operating loss
carry"or*ard!
-! Apply intraperiod ta% allocation!
.! Classi"y de"erred ta% liabilities and
assets!
Objectives
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4
1! Because there are di""erences bet*een *hen anevent is recognized "or ta% purposes and *hen itis recognized "or "inancial purposes/ there *ill be
di""erences bet*een ta% e%pense on the incomestatement and ta%es actually paid!
#! he obective o" accounting "or income ta%es onthe accrual basis is to recognize the amount o"
current and de"erred ta%es payable or re"undableat the date o" the "inancial statements!
1! Because there are di""erences bet*een *hen anevent is recognized "or ta% purposes and *hen itis recognized "or "inancial purposes/ there *ill be
di""erences bet*een ta% e%pense on the incomestatement and ta%es actually paid!
#! he obective o" accounting "or income ta%es onthe accrual basis is to recognize the amount o"
current and de"erred ta%es payable or re"undableat the date o" the "inancial statements!
ContinuedContinued
ContinuedContinued
Differences Between Taxable and
Financial Income
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5
&! hese di""erences re2uire the use o" 3e"erredIncome a% accounts to re"lect the ta%conse2uences o" events recognized in di""erent
periods "or "inancial and ta% reporting!(! 'ecognition o" de"erred ta% liabilities and
de"erred ta% assets is re2uired "or domestic"ederal income ta%es/ and "oreign/ state/ and local4including "ranchise5 ta%es based on income!
&! hese di""erences re2uire the use o" 3e"erredIncome a% accounts to re"lect the ta%conse2uences o" events recognized in di""erent
periods "or "inancial and ta% reporting!(! 'ecognition o" de"erred ta% liabilities and
de"erred ta% assets is re2uired "or domestic"ederal income ta%es/ and "oreign/ state/ and local4including "ranchise5 ta%es based on income!
Differences Between Taxable and
Financial Income
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6
he obective o" "inancial
reporting is to provide
use"ul in"ormation about
companies to decisionmakers!
he obective o" "inancial
reporting is to provide
use"ul in"ormation about
companies to decisionmakers!
Income
State-
ment
Income
Tax
Return
Overview and Definitions
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7
Income
State-
ment
Income
Tax
Return
6rees Corporation
Income Statement
6or 7ear $nded 1#8&180,
'evenues 91-0/000
Cost o" goods sold 4,-/0005
:ross pro"it 910)/000
;ther e%penses 4+0/0005
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8
Income
State-
ment
Income
Tax
Return
6rees Corporation
Income a% 'eturn
6or 7ear $nded 1#8&180,
'evenues 91,0/000
Cost o" goods sold 4,0/0005
:ross pro"it 9100/000
;ther e%penses 4+0/0005
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1! Should corporations be re2uired to makeinterperiod income ta% allocations "ortemporary di""erences/ or should there be nointerperiod ta% allocation=
#! I" interperiod ta% allocation is re2uired/ shouldit be based on a comprehensive approach "orall temporary di""erences or on a partialapproach "or certain temporary di""erences=
&! Should interperiod ta% allocation be appliedusing the asset8liability method or the de"erredmethod=
Conceptual Issues
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he 6ASB concluded that>>
Interperiod income ta% allocation o"
temporary di""erences is appropriate! he comprehensive allocation approach is
to be applied!
he asset8liability method o" income ta%
allocation is to be used!
Conceptual Issues
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Some items o" revenue and
e%pense that a corporation
reports "or "inancialaccounting purposes are
never reported "or income
ta% purposes! hese
permanent differences neverreverse in a later accounting
period!
Permanent Differences
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Permanent Differences
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'evenues that are recognized "or"inancial reporting purposes but are
never ta%able1! Interest on state and local government
bonds
#! ?i"e insurance proceeds payable to acorporation upon death o" insured
'evenues that are recognized "or"inancial reporting purposes but are
never ta%able1! Interest on state and local government
bonds
#! ?i"e insurance proceeds payable to acorporation upon death o" insured
ContinuedContinuedContinuedContinued
Permanent Differences
15
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$%penses that are recognized "or"inancial reporting purposes but are
never deductible "or income ta%
purposes1! ?i"e insurance premiums on o""icers
#! 6ines resulting "rom a violation o" the
la*&! $%penses incurred in obtaining ta%>
e%empt income
$%penses that are recognized "or"inancial reporting purposes but are
never deductible "or income ta%
purposes1! ?i"e insurance premiums on o""icers
#! 6ines resulting "rom a violation o" the
la*
&! $%penses incurred in obtaining ta%>
e%empt income
ContinuedContinuedContinuedContinued
Permanent Differences
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Corporations receive a ,0
deduction "or dividends received i"
less than #0 o" a U!S! corporation is
o*ned/ an -0 deduction "or
dividends received i" -0 or less o" a
U!S! corporation is o*ned/ and a
100 deduction "or dividends
received i" more than -0 o" a U!S!
corporation is o*ned!
Corporations receive a ,0
deduction "or dividends received i"
less than #0 o" a U!S! corporation is
o*ned/ an -0 deduction "or
dividends received i" -0 or less o" a
U!S! corporation is o*ned/ and a
100 deduction "or dividends
received i" more than -0 o" a U!S!
corporation is o*ned!
Dividend eceived Deduction
18
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A temporary difference
causes a di""erence
bet*een a
corporation@s preta%
"inancial income and
ta%able income that
originates in one ormore years and
reverses in later
years!
Temporar! Differences
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1! 6or e%ample/ a depreciable asset may be
depreciated using DAC'S over the
prescribed ta% li"e "or income purposes/ but
using straight>line depreciation over a longer
li"e "or "inancial reporting purposes!
1! 6or e%ample/ a depreciable asset may be
depreciated using DAC'S over the
prescribed ta% li"e "or income purposes/ but
using straight>line depreciation over a longerli"e "or "inancial reporting purposes!
6uture a%able Income Eill Be Figher han
6uture
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20
#! :ross pro"it on installment sales normally is
recognized at the point o" sale "or "inancial
reporting purposes/ but "or income ta%
purposes/ in certain situations it is recognized
as cash is collected!
#! :ross pro"it on installment sales normally is
recognized at the point o" sale "or "inancial
reporting purposes/ but "or income ta%
purposes/ in certain situations it is recognizedas cash is collected!
6uture a%able Income Eill Be Figher han
6uture
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&! It is assumed that investment income
reported under the e2uity method "or
"inancial purposes/ but not received as a
dividend/ *ill eventually be received as
dividends or as a gain *hen the stock is sold!
&! It is assumed that investment income
reported under the e2uity method "or
"inancial purposes/ but not received as a
dividend/ *ill eventually be received asdividends or as a gain *hen the stock is sold!
6uture a%able Income Eill Be Figher han
6uture
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(!
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23
+!
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1! 6or e%ample/ items such as rent/ interest/ and
royalties received in advance are ta%able
*hen received but are not reported "or"inancial reporting purposes until the service
actually has been provided!
1! 6or e%ample/ items such as rent/ interest/ and
royalties received in advance are ta%able
*hen received but are not reported "or
"inancial reporting purposes until the service
actually has been provided!
6uture
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#!
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&! Bad debts e%pense estimated "or "inancial
reporting/ but not deductible until the
receivable is *ritten o"" "or ta% purposes!(!
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)! Accrued litigation losses "or "inancial
reporting/ but not deducted until paid "or ta%
purposes!
+! ?osses on investments classi"ied as tradingsecurities!
,! Unrealized pro"it on sale and leaseback "or
"inancial reporting and a pro"it on the sale "or
ta% purposes!
)! Accrued litigation losses "or "inancialreporting/ but not deducted until paid "or ta%
purposes!
+! ?osses on investments classi"ied as tradingsecurities!
,! Unrealized pro"it on sale and leaseback "or
"inancial reporting and a pro"it on the sale "or
ta% purposes!
6uture
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9
1! A current ta% liability or asset isrecognized "or the estimated income ta%obligation or re"und on its income ta%
return "or the current year!#! A de"erred ta% liability or asset is
recognized "or the estimated "uture ta%e""ects o" each temporary di""erence!
ContinuedContinuedContinuedContinued
Conceptual Issues
30
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&! he measurement o" de"erred ta%
liabilities and assets is based on
provisions o" the enacted ta% la*H the
e""ects o" "uture changes in ta% la* orrates are not anticipated!
(! he measurement o" de"erred ta%
assets is reduced/ i" necessary/ by theamount o" any ta% bene"its that are
not e%pected to be realized!
Conceptual Issues
31
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1! he applicable income ta%
rates!
#! Ehether a valuation
allo*ance should beestablished "or de"erred
ta% assets!
he FASB addressed t*o issues regardingthe measurement o" de"erred ta%
liabilities or de"erred ta% asset in its
"inancial statements!
#easurement
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Step 1. Deasure the income ta% obligation by
applying the applicable ta% rate to the
current ta%able income!
Step 2. Identi"y the e%isting temporary di""erences
and classi"y each as eitherta%able or
deductible!
Step 3. Deasure the de"erred ta% liability "or eachta%able temporary di""erence using the
applicable ta% rate!
ContinuedContinuedContinuedContinued
$teps in ecording and
eporting of Current and
Deferred Taxes
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In #00,/ rack Company purchased an asset
at a cost o" 9+/000! 6or "inancial reporting
purposes/ the asset has a (>year li"e/ no
residual value/ and is depreciated by theunits>o">output method over +/000 units
4#00, 1/+00 units5! 6or income ta% purposes
the asset is depreciated under DAC'S using
the &>year li"e 4&&!&& "or #00,5! he ta%ableincome is 9,/)00 and the income ta% rate "or
#00, is &0!
In #00,/ rack Company purchased an assetat a cost o" 9+/000! 6or "inancial reporting
purposes/ the asset has a (>year li"e/ no
residual value/ and is depreciated by the
units>o">output method over +/000 units
4#00, 1/+00 units5! 6or income ta% purposes
the asset is depreciated under DAC'S using
the &>year li"e 4&&!&& "or #00,5! he ta%ableincome is 9,/)00 and the income ta% rate "or
#00, is &0!
Basic %ntries
his button *ill be used laterhis button *ill be used later
35
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In the "uture ta%able income *ill be higher
than "inancial income/ so the ta%able amount
times the ta% rate is the de"erred ta% liability!
In the "uture ta%able income *ill be higher
than "inancial income/ so the ta%able amount
times the ta% rate is the de"erred ta% liability!
Financial Income Tax
Year Depreciation Depreciation Difference
#00, 91/+00 9#/000 (00
Deferred Tax &iabilit!
36
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Step 1. 9,/)00 4ta%able income5 % &0 Step 2. he depreciation di""erence is identi"ied as
the only ta%able temporary di""erence!
Step 3. he 91#0 total de"erred ta% liability is
calculated by multiplying the total ta%able
temporary di""erence 49(005 times the "uture
ta% rate 4&05!
Steps 4 and 5. No de"erred ta% asset/ so notre2uired!
Step 6. A ournal entry is made!
ContinuedContinuedContinuedContinued
Basic %ntries
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Income a% $%pense 4plug5 #/&,0
Income a%es
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Assume the same "acts as in Slide &(/ e%cept that the
income ta% rate "or #00, "or (0/ but Congress has
enacted ta% rates o" &) "or #00-/ && "or #00./
and &0 "or #010 and beyond!
Assume the same "acts as in Slide &(/ e%cept that the
income ta% rate "or #00, "or (0/ but Congress has
enacted ta% rates o" &) "or #00-/ && "or #00./
and &0 "or #010 and beyond!
6inancial Income a%
7ear 3epreciation 3epreciation
#00, 9#/-00 9#/++,
#00- 1/100 --.
#00. )00 (((
Click here to review Slide 3! then click
the "utton on Slide 3 to return#
%xample '"#ultiple ates
40
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#00, #00- #00.
3e"erred a% ?iability
6inancial depreciation 9#/-00 91/100 9)00
Income ta% depreciation4#/++,5 4--. 5 4((( 5a%able amount 9 1&& 9 #11 9 )+ G 9(00
Income ta% rate 0!&) 0!&& 0!&0
3e"erred ta% liability 9 (, 9 ,0 9 1, G 91&(
Income a% $%pense 4plug5 &/1&(
3e"erred a% ?iability 1&(
Income a%es
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Klemper Company sells a
product on *hich it provides a
&>year *arranty! 6or
"inancial reporting purposes/
the company estimates its
"uture *arranty costs and
records a *arrantye%pense8liability at year>end!
6or income ta% purposes/ the
company deducts its *arranty
costs *hen paid!
Klemper Company sells a
product on *hich it provides a
&>year *arranty! 6or
"inancial reporting purposes/
the company estimates its
"uture *arranty costs and
records a *arranty
e%pense8liability at year>end!
6or income ta% purposes/ the
company deducts its *arranty
costs *hen paid!
Deferred Tax Asset
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At the beginning o" #00,/ the company had a
de"erred ta% asset o" 9&&0 related to its *arranty
plan! At the end o" #00,/ the company estimates that
its ending *arranty liability is 91/(00! In #00,/ thecompany has ta%able income o" 9)/000 and a ta% rate
o" &0! he ending 3e"erred Asset should be 91/(00
L &0/ or 9(#0!
At the beginning o" #00,/ the company had a
de"erred ta% asset o" 9&&0 related to its *arranty
plan! At the end o" #00,/ the company estimates that
its ending *arranty liability is 91/(00! In #00,/ thecompany has ta%able income o" 9)/000 and a ta% rate
o" &0! he ending 3e"erred Asset should be 91/(00
L &0/ or 9(#0!
Income a% $%pense 4plug5 91/(10
3e"erred a% Asset 49(#0 > 9&&05 .0
Income a%es
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Deferred Tax Asset and (aluation
Allowance
I" it is more likely than
not that a de"erred ta%
asset *ill not be realized/
a valuation allo*ancemust be established!
I" it is more likely than
not that a de"erred ta%
asset *ill not be realized/
a valuation allo*ance
must be established!
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)egative %vidence
Negative evidence indicating the need "or a valuationallo*ance include
1! A history o" operating loss or ta% credit carry"or*ardse%piring unused!
#! ?osses e%pected in early "uture years 4by a presentlypro"itable entity5!
&! Unrecognized loss contingencies that/ i" un"avorablyresolved/ *ould adversely a""ect "uture operations andpro"it levels on a continuing basis in "uture years!
(! A carryback/ carry"or*ard period that is so brie" that it*ould limit realization o" ta% bene"its!
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Positive %vidence
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Deferred Tax Assets and
(aluation Allowance
At the end o" #00,/ Klemper Corporation
decides that it is more likely than not that
9+00 o" the ending temporary di""erence
*ill not be realized! 4&0 ta% rate5
At the end o" #00,/ Klemper Corporation
decides that it is more likely than not that
9+00 o" the ending temporary di""erence
*ill not be realized! 4&0 ta% rate5
Income a% $%pense 1-0
Allo*ance to 'educe 3e"erreda% Asset to 'ealizable Malue 1-0
47
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o""s 4deductible item5 LL LL
LL
?ess a%able temporary items LL
a% e%empt interest LL
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%xample *"Pages +*+ , +-.
Assume the "ollo*ing "or Sand Company "or #00,
Interest on municipal bonds 91/)00
:ross pro"it on installment sales>"inancial 10/000
:ross pro"it on installment sales>ta%able #/000'ent revenue>"inancial &/000
'ent revenue>ta%able ./000
ta% "inancial income ,)/)003e"erred ta% liability>an! 1/ #00, &00
3e"erred gross pro"it>installment sales>#00+ 1/000
Dake the ournal entry "or #00,!
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Deferred Tax Assets and
&iabilities
Income a% $%pense 4plug5 ##/#003e"erred a% Asset 1/-00
3e"erred a% ?iability #/(00
a%es
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6ASB concluded in FASB
Statement o. 1!" that
:AA< "or operating
carrybacks and
carry"or*ards are!!!
6ASB concluded in FASB
Statement o. 1!" that
:AA< "or operating
carrybacks andcarry"or*ards are!!!
Conceptual Issues
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1! A corporation must recognize the ta% bene"it o"an operating loss carryback in the period o" the
loss as an asset on its balance sheet and as a
reduction o" the operating loss on its income
statement!
#! A corporation must recognize the ta% bene"it o"
an operating loss carry"or*ard in the period o"
the loss as a de"erred ta% asset! Fo*ever/ itmust reduce the de"erred ta% asset by a
valuation allo*ance i" it is more likely than not
that the corporation *ill not realize some or all
o" the de"erred ta% asset!
Conceptual Issues
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Donk Company reports a preta% operating loss o"9.0/000 in #00, "or both "inancial reporting and
income ta% purposes/ and that reported preta%
"inancial income and ta%able income "or the previous
# years had been #00)>>9(0/000 4ta% rate #)5H and#00+>>9,0/000 4ta% rate &05!
Donk Company reports a preta% operating loss o"9.0/000 in #00, "or both "inancial reporting and
income ta% purposes/ and that reported preta%
"inancial income and ta%able income "or the previous
# years had been #00)>>9(0/000 4ta% rate #)5H and#00+>>9,0/000 4ta% rate &05!
Income a% 'e"und 'eceivable #)/000
Income a% Bene"it 6rom
;perating ?oss Carryback #)/000
#00) 9(0/000 % 0!#) G#00) 9(0/000 % 0!#) G 910/000910/000
#00+ 9)0/000 % 0!&0 G#00+ 9)0/000 % 0!&0 G 1)/0001)/000
9#)/0009#)/000
Operating &oss Carr!bac/
ContinuedContinuedContinuedContinued
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Income $tatement
An operating loss is reduced by the bene"it/
not by the total carryback!
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?ake Company reports a preta% operating loss o"
9+0/000 in #00, "or both "inancial reporting and
income ta% purposes! he income ta% rate is &0
and no change in the ta% rate has been enacted "or
"uture years! he de"erred ta% asset is calculated to
be 91-/000 49+0/000 % 0!&05!
?ake Company reports a preta% operating loss o"
9+0/000 in #00, "or both "inancial reporting and
income ta% purposes! he income ta% rate is &0
and no change in the ta% rate has been enacted "or"uture years! he de"erred ta% asset is calculated to
be 91-/000 49+0/000 % 0!&05!
3e"erred a% Asset 1-/000 Income a% Bene"it 6rom
;perating ?oss Carry"or*ard 1-/000
ContinuedContinuedContinuedContinued
Operating &oss Carr!forward
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I" the company establishes a valuation allo*ance "or
the entire amount o" the de"erred ta% asset/ it also
makes the "ollo*ing ournal entry at the end o" #00,!
I" the company establishes a valuation allo*ance "or
the entire amount o" the de"erred ta% asset/ it also
makes the "ollo*ing ournal entry at the end o" #00,!
Income a% Bene"it 6rom ;perating
?oss Carry"or*ard 1-/000
Allo*ance to 'educe 3e"erred a%
Asset to 'ealizable Malue 1-/000
Operating &oss Carr!forward
ContinuedContinuedContinuedContinued
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In #00-/ ?ake Company operates success"ully and
earns preta% operating income o" 9100/000 "or both
"inancial reporting and ta% purposes!
In #00-/ ?ake Company operates success"ully and
earns preta% operating income o" 9100/000 "or both
"inancial reporting and ta% purposes!
Income a% $%pense 1#/000
Allo*ance to 'educe 3e"erred a%
Asset to 'ealizable Malue 1-/000
Income a%es
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Income ta% allocation
*ithin a period is
mandatory under:AA
Income ta% allocation
*ithin a period is
mandatory under
:AA
Intraperiod Tax Allocation
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Intraperiod Tax Allocation
Income ta% may appear in "ive di""erent placesin the "inancial statements "or a period!
1! Income "rom continuing operations
#! 3iscontinued operations
&! $%traordinary items
(!
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Income "rom continuing operations
9#,0/000 4revenues5 O 91.0/000 4e%penses5P 9-0/000
:ain on disposal o" discontinued Segment L 1-/000?oss "rom operations o" discontinued Segment L 4)/000 5
$%traordinary loss on bond redemption 410/000 5
Cumulative e""ect o" change in accounting
principle 4accelerated depreciation to S8?5 1)/000
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Kallo*ay Company
is subect to income
ta% rates o" #0 onthe "irst 9)0/000 o"
income and &0 on
all income in e%cesso" 9)0/000!
Kallo*ay Company
is subect to income
ta% rates o" #0 onthe "irst 9)0/000 o"
income and &0 on
all income in e%cesso" 9)0/000!
?et@s take a look atKallo*ay
Company@s income
statement "or #00,!
?et@s take a look atKallo*ay
Company@s income
statement "or #00,!
ContinuedContinuedContinuedContinued
Intraperiod Tax Allocation
63
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No*/ let@s e%amineKallo*ay Company@s
income statement "or
#00,!
No*/ let@s e%amineKallo*ay Company@s
income statement "or
#00,!
Intraperiod Tax Allcoation
66
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40!#0 % 9)0/0005 J40!#0 % 9)0/0005 J
40!&0 % 9&0/000540!&0 % 9&0/0005
Kallo*ay Company
Income Statement
"or 7ear $nded 3ecember &1/ #00,
'evenues 4listed separately5 9#,0/000
$%penses 4listed separately5 41.0/0005
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Kallo*ay Company
Income Statement
"or 7ear $nded 3ecember &1/ #00,
'evenues 4listed separately5 9#,0/000$%penses 4listed separately5 41.0/0005
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Income be"ore e%traordinary item 9,0/100
$%traordinary loss "rom tornado4net o" 9&/000 income ta% credit5 4,/0005
Net Income 9+&/100
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A corporation must report
its de"erred ta% liabilities
and assets in t*o
classi"ications!!!
A corporation must report
its de"erred ta% liabilities
and assets in t*o
classi"ications!!!
Qa net current
amount and a net
noncurrent
amount!
Qa net current
amount and a net
noncurrent
amount!
Balance $0eet Presentation
70
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3e"erred ta% liabilities andassets are classi"ied as
current or noncurrent
based upon their related
assets or liabilities "or"inancial reporting!
3e"erred ta% liabilities and
assets are classi"ied as
current or noncurrent
based upon their related
assets or liabilities "or"inancial reporting!
Balance $0eet Presentation
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72
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Current and )oncurrent
'elated
Asset or?iability Classi"ication
Installment sales Accounts 'eceivable Current
Inventory di""erences Inventory CurrentAllo*ance "or 3oubt"ul Accounts 'eceivable Current3epreciation di""erences
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%ccount Related &alance
Deferred Tax %ccount' &alance Sheet %ccount
$eferred %a# &iabilities
Installment sales 9 +/000 credit Accounts receivable
3epreciation 91#/000 credit
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he ne%t slide presents an
illustration that includes
several temporarydi""erences! Assume ta%able
income o" 9,00/000 at a
&0 ta% rate!
he ne%t slide presents an
illustration that includes
several temporarydi""erences! Assume ta%able
income o" 9,00/000 at a
&0 ta% rate!
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76
Current and Deferred Amounts
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Current and Deferred Amounts
on I)CO#% $TAT%#%)T
a%es
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Chapter19
Tas& (or'e Ima$e Ga##er) '#!p art !n'#u%e% !n th!s e#e'tron!' presentat!on !s use% *!th the perm!ss!on o +Te'h In'"
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