Deferred Taxes

Question 1

What is a temporary difference related to deferred taxes?

Answer 1

GAAP says to recognize a revenue/expense in one period and tax laws say to recognize it in another

Example: Dividends from a subsidiary accounted for using the Equity Method - tax income but not book income

Question 2

What is a deferred tax asset?

Answer 2

Deduction will reduce future income taxes expense.

Question 3

What is a deferred tax liability?

Answer 3

Income will be taxable in a future period and will increase future tax expense

Question 4

Which period’s tax rate is used to calculate a deferred tax asset or liability?

Answer 4

The FUTURE enacted tax rate not the current one.

It is never discounted to present value.

Question 5

What valuation allowance is used with respect to a deferred tax asset?

Answer 5

If it isprobable that not all of a Deferred Tax Asset (debit) will be realized then the Deferred Tax Asset account must be written down (credit) to reflect this

Question 6

What effect do permanent differences have on deferred income taxes?

Answer 6

They have no tax impact.

When calculating the total differences between book and tax income subtract the permanent differences from the total before applying a future enacted tax rate

Question 7

What is deferred income tax expense?

Answer 7

The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities

GAAP Method for calculating is theAsset and Liability Approach

Note: IFRS uses the Liability approach only

Question 8

How are deferred tax assets classified as current or non-current on the balance sheet?

Answer 8

Current Deferred Tax Assets and Liabilities will impact income tax expense within 12 months. All current amounts are netted and reported as a single amount on the Balance Sheet

Non-Current Deferred Tax Assets and Liabilities will impact income tax expense 12 months or more fromt he Balance Sheet Date. All non-current amounts are netted and reported as a single amount on the Balance Sheet

Question 9

Objective of accounting for income taxes

Answer 9

To recognize amount of current and deferred taxes payable or refundable

Question 10

Calculate income tax expense

Answer 10

Amount currently payable + tax effect of temporary differences

Question 11

Treatment of permanent differences in deferred tax liability

Answer 11

Exclude permanent differences from deferred tax liability

Question 12

What rate to use for deferred tax liability

Answer 12

Use current tax rate or enacted future tax rate if different

Question 13

What is the deferred income tax expense or benefit

Answer 13

Net change during the year in an enterprises deferred tax liabilities or assets

Question 14

Journal entry for increase in deferred tax asset and income tax payable

Answer 14

DR Income tax expense - current
CR Income tax payable

DR Deferred tax asset
CR Income tax expense - Deferred

Question 15

Journal entry for deferred tax asset valuation allowance

Answer 15

DR Income tax expense - deferred

CR Allowance to reduce DTA expense - deferred

Question 16

Calculate dividend received deduction permanent difference

Answer 16

DRD x (Accounting dividend revenue - tax dividend revenue)

Question 17

Calculate dividend received deduction temporary difference

Answer 17

(1-DRD) x (Accounting dividend revenue - tax dividend revenue)

Question 18

Journal entry for loss carry back

Answer 18

DR Tax refund receivable

CR Benefit due to loss carryback

Question 19

Journal entry for loss carryforward

Answer 19

DR DTA

CR benefit due to loss carryforward

Question 20

Where is loss carryforward or loss carryback shown on income statement?

Answer 20

After loss before income taxes

Question 21

What does loss carryforward or loss carryback reduce

Answer 21

Reduces current income tax expense

Question 22

When is a valuation allowance required

Answer 22

Inconsistent company performance and lack of positive evidence since a DTA may not be used

Question 23

Classification of deferred tax liability from depreciation

Answer 23

Noncurrent liability

Question 24

Two classifications of deferred tax assets and liabilities and when to use each classification

Answer 24

Current and noncurrent

Based on related asset or liability
If not related to an asset or liability then based on timing of reversal or date of utilization

Question 25

How is a receivable for taxes paid refundable through a carryback treated

Answer 25

Not a deferred tax asset and does not offset a deferred tax liability

Question 26

How is income tax expense allocated on the income statement

Answer 26

Allocated between continuing operations, extraordinary items, etc

Computed by determining income tax on overall income and comparing to tax on continuing operations. If more than 1 special items exists, proportionally allocate tax in special items

Question 27

Where is the tax benefit of an operating loss carryforward or carryback reported

Answer 27

Reported in same manner as source of income (loss) in current year