Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Income tax
CHAPTER 19
Homework problems
E19-1 one rate, no beginning balance, 1 difference, 1 year
E19-2 one rate, no beginning balance, 2 differences, 2 years
E19-3 one rate, with beginning balance, 1 difference, 2 years
E19-5 one rate, with beginning balance, 2 difference (1 DTA, 1 DTL)
E19-10 NOL multiple rates (this problems is exactly like the NOL on my slides)
E19-11 Current vs non-current deferred tax presentation on balance sheet
E19-13 multiple rates, effect of beginning balance in DTL.
I expect to have questions about the following
on the quiz
1. Calculate tax expense 1 rate 1 temporary difference no beginning balance
2. Calculate tax expense 2 rates 1 temporary difference no beginning balance
3. Calculate EOY balance DTA, 2 rates
4. Calculate EOY balance DTL, 2 rates
5. Change in mandated tax rates
6. Current non/current balance sheet disclosure
7. NOL Tax benefit
8. NOL – DTA
9. 2 CPA questions on above topics
Deferred Taxes: Basics
Deferred taxes arise when income tax expense differs from income tax liability.
The income tax liability is determined under the Internal Revenue Code.
Deferred tax asset arises due to temporary differences that lead to net
deductible amounts when they reverse in the future.
Simple example
But we don’t pay 45 in either year
X has $200 revenue in 2016 and 2017. The firm has one asset that will last 2 years and will be deprecated $50 in 2016 and $50 in 2017.
No other expenses before tax. 30% tax rate. Tax law allows X to depreciate $100 in 2016 and $0 in 2017.
GAAP income before tax = 200 – 50 = $150
How much income
Cash taxes = (200 – 100) x 30% =<$30>
Deferred Tax expense =<$15>
should we recognize?
Net Income =$105
Income b4 tax =$150
Same firm in 2017 Less 30% tax= 105
GAAP income before tax = 200 – 50 = $150
Cash taxes = (200 – 0) x 30% =<$60>
Accelerated
Deferred Tax benefit = $15
Net Income =$105
depreciation increases
taxes in future
Deferred Tax Liability
Simple example continued
Over 2 years Depreciation Expense is $100 for both tax and GAAP
Any difference is temporary
◦ This will create deferred tax expense and a deferred tax liability
Simple example – 2: Deferred Tax Asset
2016 Y receives $100 cash for 2017 rent – unearned rent revenue. The firm’s only expense is tax of 30%. Tax law forces Y recognize the
rent as revenue in 2016. We should recognize $0 net income in 2016 and $70 in 2017.
2016
GAAP income before tax = 0 = $0
Without Deferred tax
Cash taxes = (100) x 30% =<$30>
Deferred Tax benefit =$30
2016 NI = <$30>
Net Income =$0 2017 NI = $100
If future tax rates change: use the enacted tax rate expected to apply in the
future year.
If new rates are not yet enacted into law for future years, the current rate
should be used.
DTA and DTL: Two temporary differences
Two Temporary differences originating in 2017
Tax
Rent Revenue 20,000 0
Tax
Rent Revenue 20,000 0
EOY Balance
Tax expense
is the plug
Calculating Tax Expense number
Tax Expense JE 2017
Income tax expense 120,000
Deferred tax asset 8,000 Taxable income
280,000
Deferred tax liability 16,000 X 40%
Taxes Payable 112,000
DTA DTL
2017 8,000 16,000
In 2018 differences start to reverse
2018
DTA EOY Balance
◦ EOY Cumulative Difference 0 DTA
◦ Tax rate 40%
◦ Deferred Tax Asset 0
DTL
◦ EOY Cumulative Difference 30,000
◦ Tax rate 40%
◦ Deferred Tax Liability 12,000 EOY Balance
DTL
Reversals in 2018
Taxable income = 325,000 (Given in problem)
Tax rate = 40%
Tax Payable = 130,000
Journal Entry
Income tax expense 134,000 (plug number)
Deferred tax Liability 4,000
Deferred tax asset 8,000
Taxes Payable 130,000
DTA DTL
2017 8,000 16,000
8,000 4,000
2018
EOY Balance 12,000 EOY Balance
0
Multiple tax rates
What happens when future tax rates are not all the same?
EOY Balance
In other words, what if we have deferred tax asset and deferred tax liability and congress
changes the tax rates?
Revision of Future Tax Rates:
From
Example Prior Year
Old Tax
End of 2015, corporate tax rate is changed from 40% to 35%. rate
The new rate is effective January 1, 2017.
3 Million
The deferred tax account (1/1/2015) is as follows: X
Excess tax depreciation: $3 million 40%
Deferred tax liability: $1.2 million
1 Million
Related taxable amounts are expected to occur equally over Each
2016, 2017, and 2018. Year
Provide the journal entry to reflect the change.
Revision of Future Tax Rates: Example New Rate goes
into affect here
The deferred tax liability end of 2015 is as follows:
2016 2017 2018
Future tax inc $1,000,000 1,000,000 1,000,000
Tax rate 40% 35% 35%
Deferred tax liability $400,000 350,000 350,000
Entry:
Deferred Tax Liability $100,000
Income Tax Expense $100,000*
*$1,200,000 – $1,100,000
Balance Sheet Presentation
Balance Sheet Presentation:
o The deferred tax classification relates to its underlying asset or liability.
o Classify the deferred tax amounts as current or non-current.
o Sum the various deferred tax assets and liabilities classified as current.
o Sum the various deferred tax assets and liabilities classified as non-current.
Balance Sheet Presentation
Balance Sheet Presentation:
Sum the various deferred tax assets and liabilities classified as current:
o If net result is an asset, report as current asset
o If net result is a liability, report as current liability
Sum the various deferred tax assets and liabilities classified as non-current:
o If net result is an asset, report as long-term asset
o If net result is a liability, report as long-term liability
Balance sheet presentation example
In Year 1, The Consortium had three differences between its book and tax income. The first was
$5,000 excess tax deprecation on a building with a 10 year life, the second was $15,000 excess
taxable revenue that will reverse in the third year of business, the third difference is a $1,000
fine paid to local authorities that is not deductible for taxes. The firm’s tax rate is 40%. What is
the deferred tax asset that will be reported on the year 1 balance sheet?
1,500,000 x 40%
+ 1,500,000 x 34%
Change in DTL when rates change
What is net income for 2017?
Pretax Income = Taxable income
◦ No changes in temporary differences, No PD
◦ = 5,000,000
Tax Expense
◦ Current = 5,000,000 x 40% = 2,000,000
◦ Adjustment due to change in rates = -90,000
Lower Rates
◦ Total 1,910,000
Less tax
Pretax income 5,000,000
Tax Expense 1,910,000
Net Income 3,090,000
Current Non-Current
o classifying DTA/DTL as current or non-current is a function of the classification of
the underlying asset or liability.
o In this example, current and a long term portion of the installment sale
determines the classification of the DTL
Expect Expect
tax
tax refund Record all shield
here tax effects here here
NOL example
o No temporary differences
o No permanent differences (no book tax differences)
o Tax rate 45% in 2016, 2017; 40% 2018-2022
2019
Tax refund receivable 72,000
Tax benefit (negative tax expense) 72,000
NOL example
2020 (second loss = 380,000)
Go back two years then forward.
Journal entry :
Income Tax Expense $$
Valuation Allowance $$
The entry records a potential future tax benefit that is not expected to be
realized in the future.
New Tax Rates
Firm has excess tax depreciation of 300 which will reverse over 3 years 100 per year.
Year Old rates New rates
2016 35% 35%
2017 35% 40%
2018 35% 40%
Old DTL
35%*100 + 35%*100 +35%*100 = 105
New DTL
35%*100 + 40%*100 +40%*100 = 115
When a firm take tax positions that may be disallowed by the tax authorities or
the court, the firm has a contingent liability
Evaluation of a tax position
o Step 1: recognition
o The enterprise determines whether it is more likely than not that a tax position will be
sustained upon examination
o Step 2: measurement
o The tax position is measured as the largest amount of benefit that is greater than 50
and/or
How would this change if tax rate was 40% in year 1 and 2 but 30% thereafter?
Depreciation 500 per year 4,500 – 1,550= 2,950
Revenue
500 x 1 year x 40% = 200 Non-Current DTA
15,000 x 30% = 4,500
500 x 9 years x 30% = 1,350
Non-current DTL = 1,550
Example 2 - Sylvanas
Sylvanas’ Beauty shop begins business in 2012. In its first year of business the firm has 10,000 of
taxable income. There were two differences between taxable income and pretax financial income.
The first was 500 of excess deprecation for taxes and the second was $1,000 of non-taxable municipal
bond interest. The firm had a 30% tax rate in 2012 and 40% in all future years. What is Sylvanas’
2012 tax expense?
Prepare the following schedule for deferred tax amounts for the year
Depreciation, Interest on municipal bond, bad debts
Kieso Corp example
Prepare the following schedule for deferred tax amounts for the year
Depreciation, Interest on municipal bond, bad debts
Item Difference tax DTA/DTL Current Deferred tax
and income Non-current amount
statement
Tax expense 30
100 X 40% = 40 Tax payable DTL 10
Tax Payable 40
In 2012, The Syndicate has pretax financial income of 100. In that year, temporary differences
changed by 25 increasing DTA by $10. The firm has a 40% tax rate. What is the current portion
of tax expense for 2012?
On December 31st 2011 is Crystal Hall tailors reported a deferred tax asset of $100,000 due to a
net operating loss carry forward. The firm had a 25% tax rate in all years and there are no other
temporary or permanent book/tax differences. If the firm reports pretax income of 60,000, in
2012, what will be the balance in the deferred tax asset account on the 2012 balance sheet?