Accounting Lecture 7 Flashcards
(52 cards)
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depreciation!!!
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remembr depreciatin calculation
annual depreciation expense= depreciation base x depreciation rate
the depreciation base and depreciation rate will vary across the different deprecation methods but general formula stays the same
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advantage to straight line
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simple
smooth earnings
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units of production
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unites of production 2
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sum of the yrs
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sum of the yrs 2
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150 % decling
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150 % declining part 2
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17
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compare depreciation
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Revisions in depreciation are prospective, not retroactive.
Inputs in depreciation estimates are very hard to audit.
Depreciation impacts Net Income, Assets (PPE) and Owners’ Equity (RE).
*($100,000 - $500) x (1/5) = $19,900
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Revisions in depreciation are prospective, not retroactive.
Inputs in depreciation estimates are very hard to audit.
Depreciation impacts Net Income, Assets (PPE) and Owners’ Equity (RE).
*($100,000 - $500) x (1/5) = $19,900
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depreciation impacts…
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ex of straight line
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remember BV= HC-AD
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remember BV= HC-AC
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journal entry for impairments
amorization
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journal entry for impairment loss
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catoregory 3
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book tax difference
formula 1
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formula 2
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book tax difference
Income Tax Expense = Taxes Payable + Deferred Taxes
Income Tax Expense = Book Income x Tax Rate
Taxes Payable = Taxable Income x Tax Rate
Deferred Taxes = Periodic Temporary BTD x Tax Rate
Dr. Income Tax Expense $Book Income x Tax Rate
Cr. Taxes Payable $Taxable Income x Tax Rate
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specifically DTA and DTL are where?
A DTA or DTL equals the cumulative temporary difference between book
income and taxable income, times the tax rate.
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Temporary BTDs may be caused by differences in accounting for balance
sheet assets across book income and taxable income (such as depreciation of
PPE) and/or differences in accounting for balance sheet liabilities across book
income and taxable income (such as revenue recognition in relation to
deferred liabilities).
Translation: accounting for a balance sheet asset may generate a DTA
or a DTL; similarly, accounting for a balance sheet liability may
generate a DTA or a DTL.
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Additional Information Regarding DTAs/DTLs
Temporary BTDs may be caused by differences in revenue recognition and/or expense recognition across book income and taxable income.
Temporary BTDs may be caused by differences in accounting for balance
sheet assets across book income and taxable income (such as depreciation of
PPE) and/or differences in accounting for balance sheet liabilities across book
income and taxable income (such as revenue recognition in relation to
deferred liabilities).
Translation: accounting for a balance sheet asset may generate a DTA
or a DTL; similarly, accounting for a balance sheet liability may
generate a DTA or a DTL.
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Annual Changes
Years 1 - 3: Depreciation expense for books < depreciation expense for
taxes causing book income > taxable income, thus the DTL increases.
Years 4 - 5: Depreciation expense for books = depreciation expense for
taxes causing book income = taxable income, thus the DTL is static.
Years 6 - 9: Depreciation expense for books > depreciation expense for
taxes causing book income < taxable income, thus the DTL decreases.
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The periodic change in a DTA or DTL equals the periodic difference between
book income and taxable due to a timing difference, times the tax rate:
The periodic change in a DTA or DTL equals the periodic difference between
book income and taxable due to a timing difference, times the tax rate:
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Cumulative BTD = DTL/35%
Annual BTD = ∆DTL/35%
Deffered tax liability inc from 4,9.. to 7,,875 / 35%
Because the DTL increased during the year: different accounting for
PPE across book income and taxable income caused book income to be
greater than taxable income during Year 2.
The annual difference:
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what does year 5 tell us?
Because it is a DTL: cumulatively accounting for PPE has caused book
income to be greater than taxable income due to different accounting
rules across book income and taxable income.
The cumulative difference is at 12/31/Year 5:
$9,625/35% = $27,500
(2) Because the DTL did not change during the year: there was no annual
difference in accounting for PPE across book income and taxable
income during Year 5.
The annual difference:
($9,625- $9,625)/35% = $0
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permanet differences
Permanent differences do not cause timing differences/deferred taxes.
Instead, they cause the effective tax rate to differ from the statutory
federal tax rate.
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units of production = how often you use something, if I buy a pencil making machine for 100 dollars and it can make 100 pencils if this year I made 5 pencils I depreciate 5 dollars, same as steraight line but denominator is number of units
units of production = how often you use something, if I buy a pencil making machine for 100 dollars and it can make 100 pencils if this year I made 5 pencils I depreciate 5 dollars, same as steraight line but denominator is number of units
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ex of permanet t x differences
State taxes cause an increase in the effective tax rate relative to the
federal statutory rate.
Municipal bond interest* causes a decrease in the effective tax rate
relative to the federal statutory rate.
*“Muni-bond” interest is tax-free; thus, it is included in book income, but not
taxable income.
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problem questions lecture 7 part 1
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part 2 problems
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part 3 DTl
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What was the annual difference between book income and taxable income during the year
ending 1/29/2022 due to different depreciation methods? Because of differences in deprecation
methods, which was larger for the year ending 1/29/2022: book income or taxable income? By
how much?
Assume Best Buy sold all of its PPE on 1/30/2022 for $3 billion. How much tax will be owed
as a result of this transaction?
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practice test 3 patrick 12.11
