-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.

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Question 2

What is a deferred tax asset?

Answer 2

A deduction that will reduce future income tax expense.

Question 3

What is a deferred tax liability?

Answer 3

Income that 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 is used to calculate a deferred tax asset or liability, 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 is probable 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

Deferred income tax expense refers to the sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities.

GAAP Method for calculating is the Asset and Liability Approach.

Note: IFRS uses the Liability approach only.

Question 8

How are deferred tax assets classified on the balance sheet?

Answer 8

Deferred Tax Assets and Liabilities are classified as non-current on the balance sheet