Deferred Taxes Flashcards
How do you calculate effective tax rate?
(1.) Start with Net Income and adjust up or down for non taxable or non deductible items.
(2.)The effective tax rate would be the total tax due divided by the total income earned:
Example:
Net Income 200,000
(20,000) Int Rev Muni bonds
(10.000) Insurance Prem
190,000 Total
x 30% Tax Rate
57,000 Tax Due
57,000/200,000=28.5% effective Tax rate
Leer Corp.’s pretax income in the current year was $100,000. The temporary differences between amounts reported in the financial statements and the tax return are as follows:
•Depreciation in the financial statements was $8,000 more than tax depreciation.
•The equity method of accounting resulted in financial statement income of $35,000. A $25,000 dividend was received during the year, which is eligible for the 80% dividends-received deduction.
Leer’s effective income tax rate was 30%. In its current year income statement, Leer should report a current provision for income taxes of:
To calculate Provision:
(1.) Prepare M-1
Pretax Book income 100,000
+/- Permanent difference
=Book taxable 100,000
+/- Temporart difference:
depreciation +8,000
Equity Metohd -35,000
DRD +5,000
=taxable income 78,000
Tax rate 30%
Current portion 23,400
What is intraperiod tax allocation?
The term “intraperiod tax allocation” refers to the distribution of the tax expense for the period to the various categories of income as presented in the income statement and, on occasion, to items resulting in the direct adjustment of retained earnings. The need for intraperiod tax allocation thus arises from the categorization of various elements of income as one or more of the following in addition to normal, recurring operations:
a. Discontinued operations
b. Cumulative effects of accounting changes
c. Prior-period adjustments
d. Direct adjustments to capital accounts
Items treated in any of these ways must include the tax effect to maintain the proper relationship among the various income captions on the income statement.
At the end of 20X1, its first year of operations, Patch Co. has only one type of temporary difference—a $9,000 taxable temporary difference that is expected to reverse at the rate of $3,000 per year in each of the years 20X2–20X4. This temporary difference is not related to any specific asset or liability on the enterprise’s balance sheet. Assuming a 40% tax rate, Patch should report on its December 31, 20X1, balance sheet:
The deferred tax asset or liability in this case will be a liability because the underlying temporary differences are taxable temporary differences. Since the deferred tax liability is not related to an asset or liability, it should be classified according to the reversal of the underlying temporary differences (FASB ASC 740-10-45-9).
Accordingly, since 1/3 ($3,000 of the $9,000 total) of the temporary differences reverse within the next year, 1/3 of the deferred tax liability should be classified as current, and 2/3 as noncurrent. The total deferred tax liability is 40% of $9,000 = $3,600. Therefore, $1,200 should be classified as a current liability and $2,400 as a noncurrent liability.
How are deferred tax assets/liabilities presented on the B/S?
Once all items have been classified as current or noncurrent, we now net current with current and noncurrent with noncurrent, to show one net current or one net noncurrent
What is formula for Deferred Tax Liability?
Book Expense tax Income
What is formual for Deferred Tax Asset?
Book Expense>Tax Expense
Book Income
Taft Corp. uses the equity method to account for its 25% investment in Flame, Inc. During 20X1, Taft received dividends of $30,000 from Flame and recorded $180,000 as its equity in the earnings of Flame. Additional information follows:
•The dividends received from Flame are eligible for the 80% dividends received deduction.
•Enacted income tax rates are 30% for 20X1 and thereafter.
In its December 31, 20X1, balance sheet, what amount should Taft report for deferred income tax liability?
recorded equity in Flame earnings $180,000
Less dividends received in 20X1 30,000
——–
Temporary difference before dividend deduction 150,000
Less dividends received deduction (80% x $150,000) 120,000
——–
Net amount of temporary difference $ 30,000
Times tax rate x 30%
——–
Deferred income tax liability $ 9,000
========
On its December 31, 20X1, balance sheet, Shin Co. had income taxes payable of $13,000 and a current deferred tax asset of $20,000 before determining the need for a valuation account. Shin had reported a current deferred tax asset of $15,000 at December 31, 20X0. No estimated tax payments were made during 20X1. At December 31, 20X1, Shin determined that it was likely that 10% of the deferred tax asset would not be realized. In its 20X1 income statement, what amount should Shin report as total income tax expense?
JE for Income tax expense
DR Income tax Expenes
CR/DR Deferred Income tax asset/liability
CR Income tax payable
DR income tax expense 10,000 (PLUG)
DR Deferred tax asset 3,000 ((.90x20,000)-15,000)
CR Income tax payable 13,000
Hint:
To calc deferred income tax in second period get the deferred tax asset/liability amount current (REALIZED PORTION) is the target amount minus the prior month deferred tax asset/liability and the difference is the adjustment to income tax payable to calc expense.
