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Flashcards in Income Taxes Deck (34)
1

What are the 3 acceptable methods to report taxable income?

1. cash basis
2. accrual basis
3. hybrid method

2

Under the cash basis or cash receipt method, property or services are included in gross income when?

When actually or constructively received

3

What 2 criteria must be met for income to be considered constructively received?

1. it is readily available to the taxpayer
2. actual receipt is not subject to substantial limitations or restrictions

4

When are expenses deductible under the cash basis of accounting?

when actually paid with cash or other property

5

Under the cash basis of accounting, how is the deduction for capital expenditures handled?

it will be recognized in the form of depreciation, amortization or depletion

6

Under the accrual basis of accounting, when is income recognized?

when it is earned

7

Under the accrual basis of accounting, when are expenses recognized?

1. when all events have occurred to create the liability and
2. the amount of the liability can be determined with reasonable accuracy

8

How is the hybrid method used for income tax purposes?

Generally, the company uses the accrual method for the accounts involved in computing COGS and gross profit if inventory is a material income-production factor. The cash method is used for all other accounts

9

Accounting for income taxes under FASB is based on "liability method". Under the liability method, accounting for income taxes has 2 primary objectives. What are they?

1. to recognize the amount of taxes currently payable or refundable and
2. to recognize deferred tax liabilities and assets for the future tax consequences of temporary differences.

10

What are 4 examples of temporary differences arising when items are treated differently in the FS and the income TR with the expectation that those differences will offset in the future?

1. installment sales and the related asset recognized under GAAP at the time of the sale but deferred for income tax purposes until collected
2. warranty expense and the related liability recognized under GAAP at the time of sale but deferred for income tax purposes until paid
3. liability recognized for an advance payment that is taxable on receipt of cash but deferred under GAAP until earned
4. depreciation recognized more rapidly for income tax purposes than under GAAP

11

Other differences in the determination of financial and taxable income are permanent in nature in that they are not expected to reverse in the future. What are 3 examples of permanent differences?

1. interest received on investments in municipal securities that is included in the determination of financial income but not taxable
2. insurance premiums on policies' for which the company is beneficiary that are not deductible for tax purposes
3. depletion in excess of cost that is deductible for income tax purposes but is not included in the determination of financial income

12

What are the 4 basic principles applied for income taxes at the date of the FS?

1. a current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year
2. a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and CFWD
3. the measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law, the effects of future changes in tax laws or rates are not anticipated
4. the measurement of deferred tax assets is reduced by a valuation allowance if, based on available evidence, some or all of the deferred tax asset balance is not expected to be realized

13

What are the 5 steps to the annual computation of deferred taxes?

1. identify all cumulative temporary differences and operating and tax credit CFWD
2. measure the total deferred tax liability for taxable temporary differences
3. measure the total deferred tax asset for deductible temporary differences and loss CFWD
4. measure deferred tax assets for each type of tax credit CFWD
5. reduce deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized.

14

What is intraperiod tax allocation?

It 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.

15

The need for intraperiod tax allocation arises from the categorization of various elements of income as one or more recurring operations. What are these 5 items?

1. discontinued operations
2. extraordinary items
3. cumulative effects of accounting changes
4. prior-period adjustments
5. 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.

16

What is the investment tax credit (ITC)?

It a reduction in taxes payable, equal to a specified percentage of the cost of certain assets, subject to various limitations and restrictions.

17

While there is a general agreement that the ITC is an element in the determination of income of the enterprise acquiring assets that qualify, disagreement as to the timing of the impact of income has led to 2 generally accepted methods of accounting for ITC. What are they?

1. Deferred
2. flow-through
The ITC is currently included in income tax laws.
Disclosure is required of method used.

18

What is the deferred method of accounting for ITC?

It is a reduction in the net cost of assets acquired. Benefit of the ITC is created thru the use of the related asset. ITC is deferred and recognized as a reduction in tax expense over the periods benefiting from the use of the asset.

19

What is the flow-through method of accounting for ITC?

It is a reduction of taxes resulting from the investment in the acquired asset rather than from the asset's use. ITC is recognized as a reduction in tax expense in the period of asset acquisition.

20

How does FASC define a tax position?

A position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods.

21

A tax position encompasses what 5 things?

1. a decision not to file a tax return
2. an allocation or a shift of income between jurisdictions
3. the characterization of income or a decision to exclude reporting taxable income in a tax return
4. a decision to classify a transaction, entity or other position in a tax return as tax exempt
5. an entity's status, including its status as a pass-through entity or a tax-exempt not-for-profit entity

22

FASB requires that an entity must initially recognize the effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. What is the more likely than not criteria?

There must be a greater than 50% chance that the taxing authority will agree with the entity's tax position. If there is only 50% or less chance, the tax position fails the more-likely-than-not requirement. The FS must reflect that fact, meaning it should reflect the additional tax liability in the FS.

23

It an entity deems that the more-likely-than-not threshold is not met in the period in which a tax position is taken, it should recognize the benefit of the tax position in the first subsequent period in which any of what 3 conditions are met?

1. the more likely than not recognition threshold is met by the reporting date
2. the tax position is effectively settled through examination, negotiation or litigation
3. the statue of limitation of the relevant taxing authority to examine and challenge the tax position has expired.

24

An enterprise shall evaluate what 3 conditions when determining when a tax position has been effectively settled?

1. the taxing authority has completed its examination procedures including all appeals and administrative reviews that the taxing authority is required and expected to perform for the tax position
2. the entity does not intend to appeal or litigate any aspect of the tax position included in the completed examination
3. it is remote that the taxing authority would examine or reexamine any aspect of the tax position. In making this assessment, management shall consider the taxing authority's policy on reopening closed examinations and the specific facts and circumstances of the tax position. Management shall presume the relevant taxing authority has full knowledge of all relevant information in making the assessment on whether the taxing authority would reopen a previously closed examination.

25

Subsequent changes in judgment that leads to changes in recognition, derecognition and measurement should be a result of what?

of new information and not from a new evaluation by management of information that was available in a previous financial reporting period

26

When should an entity begin recognizing interest expense on an underpayment of income taxes?

in the first period the interest would begin accruing according to the provisions of the relevant tax laws. The amount to be recognized is calculated by applying the applicable statutory interest rate to the difference between the tax position recognized and the amount previously taken or expected to be taken in a tax return

27

When should an entity begin recognizing penalty expense on an underpayment of income taxes?

It should be recognized in the period in which the entity claims or expects to claim the position in the tax return.

28

How should unrecognized tax benefits appear in the financial statements?

As a liability separate from deferred tax liability unless it arises from a taxable temporary difference.

29

How should interest be recognized as a result of applying FASB 740-10-25-57?

as either income taxes or interest expense, based on the accounting policy election of the entity

30

How should penalties be recognized in accordance with FASB ASC 740-10-25-57?

either as income taxes or another expense classification based on the accounting policy election of the entity.

31

What 2 things should public entities disclose at the end of each annual reporting period presented on?

1. the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate
2. a tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period, which shall include at a minimum
a. the gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during a prior period
b. the gross amounts of increases/decreases in unrecognized tax benefits as a result of tax positions taken during the current period
c. the amounts of decreases in the unrecognized tax benefits relating to settlements with taxing authorities
d. reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations

32

What is the indefinite reversal criteria for undistributed earnings of a subsidiary?

The presumption that all undistributed earnings will be transferred to the parent company may be overcome, and no income taxes need be accrued by the parent company, if sufficient evidence shows that the subsidiary has invested or will invest the undistributed earnings indefinitely or that the earnings will be remitted in a tax-free liquidation. A parent company must have evidence of a specific plan for reinvestment of undistributed earnings . If circumstances change and it becomes apparent that some or all of the undistributed earnings will be remitted in the foreseeable future, but income taxes have not been recognized by the parent co, it should accrue as an expense of the current period income taxes. It is not an extraordinary item.

33

Regulatory authorities require both stock and mutual savings and loan association to do what?

to appropriate a portion of earnings to general reserves and to retain the reserves as a protection for depositors. Provisions in the IRC permit a savings and loan association to deduct an annual addition to a reserve for bad debts in determining taxable income, subject to certain limitations. This generally differs significantly from the bad-debt experience on which determination of pre-tax accounting income is based. Thus taxable income and pretax accounting income of an association will usually differ.

34

The APB concluded that a difference between taxable income and pretax accounting income attributable to a bad-debt reserve is accounted for how?

It is accounted for as part of the general reserves and undivided profits of a savings and loan association may not reverse until indefinite future periods, or it may never reverse.