中财英文课件：ch19 Accounting for Income Taxes

PREVIEWOFCHAPTERIntermediateAccountingIFRS2ndEditionKieso,Weygandt,andWarfield

19Describevarioustemporaryandpermanentdifferences.Explaintheeffectofvarioustaxratesandtaxratechangesondeferredincometaxes.Applyaccountingproceduresforalosscarrybackandalosscarryforward.Describethepresentationofincometaxesinfinancialstatements.Indicatethebasicprinciplesoftheasset-liabilitymethod.Afterstudyingthischapter,youshouldbeableto:AccountingforIncomeTaxes19LEARNINGOBJECTIVESIdentifydifferencesbetweenpretaxfinancialincomeandtaxableincome.Describeatemporarydifferencethatresultsinfuturetaxableamounts.Describeatemporarydifferencethatresultsinfuturedeductibleamounts.Explainthenon-recognitionofadeferredtaxasset.Describethepresentationofincometaxexpenseintheincomestatement.Corporationsmustfileincometaxreturnsfollowingtheguidelinesdevelopedbytheappropriatetaxauthority.BecauseIFRSandtaxregulationsdifferinanumberofways,frequentlytheamountsreportedforthefollowingwilldiffer:Incometaxexpense(IFRS)Incometaxespayable

(TaxAuthority)LO1ACCOUNTINGFORINCOMETAXESTaxCodeFinancialStatementsPretaxFinancialIncomeIFRSIncomeTaxExpenseTaxableIncomeIncomeTaxesPayableTaxReturnvs.LO1ACCOUNTINGFORINCOMETAXESIllustration:Chelsea,Inc.reportedrevenuesof$130,000andexpensesof$60,000ineachofitsfirstthreeyearsofoperations.Fortaxpurposes,ChelseareportedthesameexpensestotheIRSineachoftheyears.Chelseareportedtaxablerevenuesof$100,000in2015,$150,000in2016,and$140,000in2017.WhatistheeffectontheaccountsofreportingdifferentamountsofrevenueforIFRSversustax?LO1ACCOUNTINGFORINCOMETAXESRevenuesExpensesPretaxfinancialincomeIncometaxexpense(40%)$130,00060,000$70,000$28,000$130,000201660,000$70,000$28,000$130,000201760,000$70,000$28,000$390,000Total180,000$210,000$84,000IFRSReportingRevenuesExpensesTaxableincomeIncometaxespayable(40%)$100,000201560,000$40,000$16,000$150,000201660,000$90,000$36,000$140,000201760,000$80,000$32,000$390,000Total180,000$210,000$84,000TaxReporting2015ILLUSTRATION19-3Bookvs.TaxDifferencesLO1ILLUSTRATION19-2FinancialReportingIncomeIncometaxexpense(IFRS)Incometaxpayable(TA)DifferenceIncometaxexpense(40%)$28,00016,000$12,000$28,000$28,000201636,000$(8,000)$28,000$28,000201732,000$(4,000)$28,000$84,000Total84,000$0$84,000Comparison2015Arethedifferencesaccountedforinthefinancialstatements?YearReportingRequirement201520162017Deferredtaxliabilityaccountincreasedto$12,000Deferredtaxliabilityaccountreducedby$8,000Deferredtaxliabilityaccountreducedby$4,000YesBookvs.TaxDifferencesLO1ILLUSTRATION19-4ComparisonofIncomeTaxExpensetoIncomeTaxesPayableStatementofFinancialPositionAssets:Liabilities:Equity:Incometaxexpense 28,000IncomeStatementRevenues:Expenses:Netincome(loss)20152015Deferredtaxes 12,000Wheredoesthe“deferredtaxliability”getreportedinthefinancialstatements?Incometaxespayable 16,000FinancialReportingfor2015LO1Describevarioustemporaryandpermanentdifferences.Explaintheeffectofvarioustaxratesandtaxratechangesondeferredincometaxes.Applyaccountingproceduresforalosscarrybackandalosscarryforward.Describethepresentationofincometaxesinfinancialstatements.Indicatethebasicprinciplesoftheasset-liabilitymethod.Afterstudyingthischapter,youshouldbeableto:AccountingforIncomeTaxes19LEARNINGOBJECTIVESIdentifydifferencesbetweenpretaxfinancialincomeandtaxableincome.Describeatemporarydifferencethatresultsinfuturetaxableamounts.Describeatemporarydifferencethatresultsinfuturedeductibleamounts.Explainthenon-recognitionofadeferredtaxasset.Describethepresentationofincometaxexpenseintheincomestatement.Atemporarydifference

isthedifferencebetweenthetaxbasisofanassetorliabilityanditsreported(carryingorbook)amountinthefinancialstatementsthatwillresultintaxableamountsordeductibleamountsinfutureyears.FutureTaxableAmountsFutureDeductibleAmountsDeferredTaxLiabilityrepresentstheincreaseintaxespayableinfutureyearsasaresultoftaxabletemporarydifferencesexistingattheendofthecurrentyear.DeferredTaxAssetrepresentstheincreaseintaxesrefundable(orsaved)infutureyearsasaresultofdeductibletemporarydifferencesexistingattheendofthecurrentyear.Illustration19-22provides

ExamplesofTemporaryDifferencesLO2FutureTaxableandDeductibleAmountsIllustration:InChelsea’ssituation,theonlydifferencebetweenthebookbasisandtaxbasisoftheassetsandliabilitiesrelatestoaccountsreceivablethatarosefromrevenuerecognizedforbookpurposes.Chelseareportsaccountsreceivableat$30,000intheDecember31,2015,IFRS-basisstatementoffinancialposition.However,thereceivableshaveazerotaxbasis.LO2FutureTaxableAmountsILLUSTRATION19-5TemporaryDifference,AccountsReceivableChelseaassumesthatitwillcollecttheaccountsreceivableandreportthe$30,000collectionastaxablerevenuesinfuturetaxreturns.Chelseadoesthisbyrecordingadeferredtaxliability.Illustration:ReversalofTemporaryDifference,ChelseaInc.LO2FutureTaxableAmountsILLUSTRATION19-6Adeferredtaxliability

representstheincreaseintaxespayableinfutureyearsasaresultoftaxabletemporarydifferencesexistingattheendofthecurrentyear.DeferredTaxLiabilityLO2FutureTaxableAmountsIncometaxexpense(IFRS)Incometaxpayable(IRS)DifferenceIncometaxexpense(40%)$28,00016,000$12,000$28,000$28,000201636,000$(8,000)$28,000$28,000201732,000$(4,000)$28,000$84,000Total84,000$0$84,0002015ILLUSTRATION19-4ComparisonofIncomeTaxExpensetoIncomeTaxesPayableIllustration:BecauseitisthefirstyearofoperationsforChelsea,thereisnodeferredtaxliabilityatthebeginningoftheyear.Chelseacomputestheincometaxexpensefor2015asfollows:LO2DeferredTaxLiabilityILLUSTRATION19-9ComputationofIncomeTaxExpense,2015Chelseamakesthefollowingentryattheendof2015torecordincometaxes.IncomeTaxExpense 28,000 IncomeTaxesPayable 16,000 DeferredTaxLiability 12,000LO2DeferredTaxLiabilityIncometaxexpense(IFRS)Incometaxpayable(IRS)DifferenceIncometaxexpense(40%)$28,00016,000$12,000$28,000$28,000201636,000$(8,000)$28,000$28,000201732,000$(4,000)$28,000$84,000Total84,000$0$84,0002015ILLUSTRATION19-4ComparisonofIncomeTaxExpensetoIncomeTaxesPayableChelseamakesthefollowingentryattheendof2016torecordincometaxes.IncomeTaxExpense 28,000DeferredTaxLiability 8,000 IncomeTaxesPayable 36,000LO2DeferredTaxLiabilityIncometaxexpense(IFRS)Incometaxpayable(IRS)DifferenceIncometaxexpense(40%)$28,00016,000$12,000$28,000$28,000201636,000$(8,000)$28,000$28,000201732,000$(4,000)$28,000$84,000Total84,000$0$84,0002015ILLUSTRATION19-4ComparisonofIncomeTaxExpensetoIncomeTaxesPayableTheentrytorecordincometaxesattheendof2017reducestheDeferredTaxLiabilityby$4,000.TheDeferredTaxLiabilityaccountappearsasfollowsattheendof2017.LO2DeferredTaxLiabilityILLUSTRATION19-11DeferredTaxLiabilityAccountafterReversalsIllustration:StarfleetCorporationhasonetemporarydifferenceattheendof2014thatwillreverseandcausetaxableamountsof$55,000in2015,$60,000in2016,and$75,000in2017.Starfleet’spretaxfinancialincomefor2014is$400,000,andthetaxrateis30%forallyears.Therearenodeferredtaxesatthebeginningof2014.InstructionsComputetaxableincomeandincometaxespayablefor2014.Preparethejournalentrytorecordincometaxexpense,deferredincometaxes,andincometaxespayablefor2014.LO2DeferredTaxLiabilitya.a.LO2DeferredTaxLiabilityLO2Describevarioustemporaryandpermanentdifferences.Explaintheeffectofvarioustaxratesandtaxratechangesondeferredincometaxes.Applyaccountingproceduresforalosscarrybackandalosscarryforward.Describethepresentationofincometaxesinfinancialstatements.Indicatethebasicprinciplesoftheasset-liabilitymethod.Afterstudyingthischapter,youshouldbeableto:AccountingforIncomeTaxes19LEARNINGOBJECTIVESIdentifydifferencesbetweenpretaxfinancialincomeandtaxableincome.Describeatemporarydifferencethatresultsinfuturetaxableamounts.Describeatemporarydifferencethatresultsinfuturedeductibleamounts.Explainthenon-recognitionofadeferredtaxasset.Describethepresentationofincometaxexpenseintheincomestatement.Illustration:During2015,CunninghamInc.estimateditswarrantycostsrelatedtothesaleofmicrowaveovenstobe$500,000,paidevenlyoverthenexttwoyears.Forbookpurposes,in2015Cunninghamreportedwarrantyexpenseandarelatedestimatedliabilityforwarrantiesof$500,000initsfinancialstatements.Fortaxpurposes,thewarrantytaxdeductionisnotalloweduntilpaid.FutureDeductibleAmountsLO3ILLUSTRATION19-12TemporaryDifference,WarrantyLiabilityWhenCunninghampaysthewarrantyliability,itreportsanexpense(deductibleamount)fortaxpurposes.CunninghamreportsthisfuturetaxbenefitintheDecember31,2015,statementoffinancialpositionasadeferredtaxasset.Illustration:ReversalofTemporaryDifference.FutureDeductibleAmountsLO3ILLUSTRATION19-13Adeferredtaxasset

representstheincreaseintaxesrefundable(orsaved)infutureyearsasaresultofdeductibletemporarydifferencesexistingattheendofthecurrentyear.DeferredTaxAssetFutureDeductibleAmountsLO3Illustration:HuntCo.accruesalossandarelatedliabilityof$50,000in2015forfinancialreportingpurposesbecauseofpendinglitigation.Huntcannotdeductthisamountfortaxpurposesuntiltheperioditpaystheliability,expectedin2016.DeferredTaxAssetLO3ILLUSTRATION19-14ComputationofDeferredTaxAsset,Endof2015LO3Assumethat2015isHunt’sfirstyearofoperations,andincometaxpayableis$100,000,computeincometaxexpense.DeferredTaxAssetPreparetheentryattheendof2015torecordincometaxes.IncomeTaxExpense 80,000DeferredTaxAsset 20,000 IncomeTaxesPayable 100,000ILLUSTRATION19-16ComputationofIncomeTaxExpense,2015ComputationofIncomeTaxExpensefor2016.DeferredTaxAssetPreparetheentryattheendof2016torecordincometaxes.IncomeTaxExpense 160,000 DeferredTaxAsset 20,000 IncomeTaxesPayable 140,000LO3ILLUSTRATION19-17ComputationofIncomeTaxExpense,2016Theentrytorecordincometaxesattheendof2016reducestheDeferredTaxAssetby$20,000.DeferredTaxAssetLO3ILLUSTRATION19-18DeferredTaxAssetAccountafterReversalsIllustration:ColumbiaCorporationhasonetemporarydifferenceattheendof2014thatwillreverseandcausedeductibleamountsof$50,000in2015,$65,000in2016,and$40,000in2017.Columbia’spretaxfinancialincomefor2014is$200,000andthetaxrateis34%forallyears.Therearenodeferredtaxesatthebeginningof2014.Columbiaexpectstobeprofitableinthefuture.InstructionsComputetaxableincomeandincometaxespayablefor2014.Preparethejournalentrytorecordincometaxexpense,deferredincometaxes,andincometaxespayablefor2014.DeferredTaxAssetLO3a.a.DeferredTaxAssetLO3LO3Describevarioustemporaryandpermanentdifferences.Explaintheeffectofvarioustaxratesandtaxratechangesondeferredincometaxes.Applyaccountingproceduresforalosscarrybackandalosscarryforward.Describethepresentationofincometaxesinfinancialstatements.Indicatethebasicprinciplesoftheasset-liabilitymethod.Afterstudyingthischapter,youshouldbeableto:AccountingforIncomeTaxes19LEARNINGOBJECTIVESIdentifydifferencesbetweenpretaxfinancialincomeandtaxableincome.Describeatemporarydifferencethatresultsinfuturetaxableamounts.Describeatemporarydifferencethatresultsinfuturedeductibleamounts.Explainthenon-recognitionofadeferredtaxasset.Describethepresentationofincometaxexpenseintheincomestatement.DeferredTaxAsset(Non-Recognition)Acompanyshouldreduceadeferredtaxassetifitisprobablethatitwillnotrealizesomeportionorallofthedeferredtaxasset.“Probable”meansaleveloflikelihoodofatleastslightlymorethan50percent.LO4ACCOUNTINGFORINCOMETAXESIllustration:CallawayCorp.hasadeferredtaxassetaccountwithabalanceof€150,000attheendof2014duetoasinglecumulativetemporarydifferenceof€375,000.Attheendof2015,thissametemporarydifferencehasincreasedtoacumulativeamountof€500,000.Taxableincomefor2015is€850,000.Thetaxrateis40%forallyears.Instructions:Assumingthatitisprobablethat€30,000ofthedeferredtaxassetwillnotberealized,preparethejournalentryattheendof2015torecognizethisprobability.LO4DeferredTaxAsset(Non-Recognition)LO4DeferredTaxAsset(Non-Recognition)Describevarioustemporaryandpermanentdifferences.Explaintheeffectofvarioustaxratesandtaxratechangesondeferredincometaxes.Applyaccountingproceduresforalosscarrybackandalosscarryforward.Describethepresentationofincometaxesinfinancialstatements.Indicatethebasicprinciplesoftheasset-liabilitymethod.Afterstudyingthischapter,youshouldbeableto:AccountingforIncomeTaxes19LEARNINGOBJECTIVESIdentifydifferencesbetweenpretaxfinancialincomeandtaxableincome.Describeatemporarydifferencethatresultsinfuturetaxableamounts.Describeatemporarydifferencethatresultsinfuturedeductibleamounts.Explainthenon-recognitionofadeferredtaxasset.Describethepresentationofincometaxexpenseintheincomestatement.IncomeTaxesPayableOrRefundableChangeInDeferredIncomeTaxesTotalIncomeTax

ExpenseorBenefit+-=Intheincomestatementorinthenotestothefinancialstatements,acompanyshoulddisclosethesignificantcomponentsofincometaxexpenseattributabletocontinuingoperations.FormulatoComputeIncomeTaxExpenseLO5IncomeStatementPresentationACCOUNTINGFORINCOMETAXESILLUSTRATION19-20FormulatoComputeIncomeTaxExpenseIncomeStatementPresentationGiventhepreviousinformationrelatedtoChelseaInc.,Chelseareportsitsincomestatementasfollows.ILLUSTRATION19-21LO5Describevarioustemporaryandpermanentdifferences.Explaintheeffectofvarioustaxratesandtaxratechangesondeferredincometaxes.Applyaccountingproceduresforalosscarrybackandalosscarryforward.Describethepresentationofincometaxesinfinancialstatements.Indicatethebasicprinciplesoftheasset-liabilitymethod.Afterstudyingthischapter,youshouldbeableto:AccountingforIncomeTaxes19LEARNINGOBJECTIVESIdentifydifferencesbetweenpretaxfinancialincomeandtaxableincome.Describeatemporarydifferencethatresultsinfuturetaxableamounts.Describeatemporarydifferencethatresultsinfuturedeductibleamounts.Explainthenon-recognitionofadeferredtaxasset.Describethepresentationofincometaxexpenseintheincomestatement.Taxabletemporarydifferences-DeferredtaxliabilityDeductibletemporarydifferences-DeferredtaxAssetTemporaryDifferencesLO6SpecificDifferencesACCOUNTINGFORINCOMETAXESLO6TemporaryDifferencesRevenuesorgainsaretaxableaftertheyarerecognizedinfinancialincome.Anasset(e.g.,accountsreceivableorinvestment)mayberecognizedforrevenuesorgainsthatwillresultintaxableamountsinfutureyearswhentheassetisrecovered.Examples:Salesaccountedforontheaccrualbasisforfinancialreportingpurposesandontheinstallment(cash)basisfortaxpurposes.Contractsaccountedforunderthepercentage-of-completionmethodforfinancialreportingpurposesandthecost-recoverymethod(zero-profitmethod)fortaxpurposes.Investmentsaccountedforundertheequitymethodforfinancialreportingpurposesandunderthecostmethodfortaxpurposes.Gainoninvoluntaryconversionofnon-monetaryassetwhichisrecognizedforfinancialreportingpurposesbutdeferredfortaxpurposes.Unrealizedholdinggainsforfinancialreportingpurposes(includinguseofthefairvalueoption)butdeferredfortaxpurposes.ILLUSTRATION19-22ExamplesofTemporaryDifferencesLO6TemporaryDifferencesExpensesorlossesaredeductibleaftertheyarerecognizedinfinancialincome.Aliability(orcontraasset)mayberecognizedforexpensesorlossesthatwillresultindeductibleamountsinfutureyearswhentheliabilityissettled.Examples:Productwarrantyliabilities.Estimatedliabilitiesrelatedtodiscontinuedoperationsorrestructurings.Litigationaccruals.Baddebtexpenserecognizedusingtheallowancemethodforfinancialreportingpurposes;directwrite-offmethodusedfortaxpurposes.Share-basedcompensationexpense.Unrealizedholdinglossesforfinancialreportingpurposes(includinguseofthefairvalueoption),butdeferredfortaxpurposes.ILLUSTRATION19-22ExamplesofTemporaryDifferencesLO6TemporaryDifferencesRevenuesorgainsaretaxablebeforetheyarerecognizedinfinancialincome.Aliabilitymayberecognizedforanadvancepaymentforgoodsorservicestobeprovidedinfutureyears.Fortaxpurposes,theadvancepaymentisincludedintaxableincomeuponthereceiptofcash.Futuresacrificestoprovidegoodsorservices(orfuturerefundstothosewhocanceltheirorders)thatsettletheliabilitywillresultindeductibleamountsinfutureyears.Examples:Subscriptionsreceivedinadvance.Advancerentalreceipts.Salesandleasebacksforfinancialreportingpurposes(incomedeferral)butreportedassalesfortaxpurposes.Prepaidcontractsandroyaltiesreceivedinadvance.ILLUSTRATION19-22ExamplesofTemporaryDifferencesLO6TemporaryDifferencesExpensesorlossesaredeductiblebeforetheyarerecognizedinfinancialincome.Thecostofanassetmayhavebeendeductedfortaxpurposesfasterthanitwasexpensedforfinancialreportingpurposes.Amountsreceiveduponfuturerecoveryoftheamountoftheassetforfinancialreporting(throughuseorsale)willexceedtheremainingtaxbasisoftheassetandtherebyresultintaxableamountsinfutureyears.Examples:Depreciableproperty,depletableresources,andintangibles.Deductiblepensionfundingexceedingexpense.Prepaidexpensesthataredeductedonthetaxreturnintheperiodpaid.Developmentcoststhataredeductedonthetaxreturnintheperiodpaid.ILLUSTRATION19-22ExamplesofTemporaryDifferencesLO6OriginatingandReversingAspectsofTemporaryDifferences.Originatingtemporarydifferenceistheinitialdifferencebetweenthebookbasisandthetaxbasisofanassetorliability.Reversingdifferenceoccurswheneliminatingatemporarydifferencethatoriginatedinpriorperiodsandthenremovingtherelatedtaxeffectfromthedeferredtaxaccount.SpecificDifferencesPermanentdifferences

resultfromitemsthat(1)enterintopretaxfinancialincomebutneverintotaxableincomeor(2)enterintotaxableincomebutneverintopretaxfinancialincome.Permanentdifferencesaffectonlytheperiodinwhichtheyoccur.Theydonotgiverisetofuturetaxableordeductibleamounts.Therearenodeferredtaxconsequencestoberecognized.LO6SpecificDifferencesLO6PermanentDifferencesItemsarerecognizedforfinancialreportingpurposesbutnotfortaxpurposes.Examples:Interestreceivedoncertaintypesofgovernmentobligations.Expensesincurredinobtainingtax-exemptincome.Finesandexpensesresultingfromaviolationoflaw.Charitabledonationsrecognizedasexpensebutsometimesnotdeductiblefortaxpurposes.ILLUSTRATION19-24ExamplesofPermanentDifferencesItemsarerecognizedfortaxpurposesbutnotforfinancialreportingpurposes.Examples:“Percentagedepletion”ofnaturalresourcesinexcessoftheircost.Thedeductionfordividendsreceivedfromothercorporations,sometimesconsideredtax-exempt.Dothefollowinggenerate:FutureDeductibleAmount=DeferredTaxAssetFutureTaxableAmount=DeferredTaxLiabilityPermanentDifferenceAnaccelerateddepreciationsystemisusedfortaxpurposes,andthestraight-linedepreciationmethodisusedforfinancialreportingpurposes.Alandlordcollectssomerentsinadvance.Rentsreceivedaretaxableintheperiodwhentheyarereceived.Expensesareincurredinobtainingtax-exemptincome.FutureTaxableAmountLO6SpecificDifferencesLiabilityFutureDeductibleAmountAssetPermanentDifferenceIllustrationDothefollowinggenerate:FutureDeductibleAmount=DeferredTaxAssetFutureTaxableAmount=DeferredTaxLiabilityPermanentDifferenceCostsofguaranteesandwarrantiesareestimatedandaccruedforfinancialreportingpurposes.Installmentsalesofinvestmentsareaccountedforbytheaccrualmethodforfinancialreportingpurposesandtheinstallmentmethodfortaxpurposes.Interestisreceivedonaninvestmentintax-exemptgovernmentalobligations.FutureDeductibleAmountLO6SpecificDifferencesAssetFutureTaxableAmountLiabilityPermanentDifferenceIllustrationE19-4:HavaciCompanyreportspretaxfinancialincomeof€80,000for2015.Thefollowingitemscausetaxableincometobedifferentthanpretaxfinancialincome.Depreciationonthetaxreturnisgreaterthandepreciationontheincomestatementby€16,000.Rentcollectedonthetaxreturnisgreaterthanrentearnedontheincomestatementby€27,000.Finesforpollutionappearasanexpenseof€11,000ontheincomestatement.Havaci’staxrateis30%forallyears,andthecompanyexpectstoreporttaxableincomeinallfutureyears.Therearenodeferredtaxesatthebeginningof2015.LO6SpecificDifferencesLO6SpecificDifferencesDescribevarioustemporaryandpermanentdifferences.Explaintheeffectofvarioustaxratesandtaxratechangesondeferredincometaxes.Applyaccountingproceduresforalosscarrybackandalosscarryforward.Describethepresentationofincometaxesinfinancialstatements.Indicatethebasicprinciplesoftheasset-liabilitymethod.Afterstudyingthischapter,youshouldbeableto:AccountingforIncomeTaxes19LEARNINGOBJECTIVESIdentifydifferencesbetweenpretaxfinancialincomeandtaxableincome.Describeatemporarydifferencethatresultsinfuturetaxableamounts.Describeatemporarydifferencethatresultsinfuturedeductibleamounts.Explainthenon-recognitionofadeferredtaxasset.Describethepresentationofincometaxexpenseintheincomestatement.Acompanymustconsiderpresentlyenactedchangesinthetaxratethatbecomeeffectiveforaparticularfutureyear(s)whendeterminingthetaxratetoapplytoexistingtemporarydifferences.FutureTaxRatesLO7TaxRateConsiderationsACCOUNTINGFORINCOMETAXESWhenachangeinthetaxrateisenacted,companiesshouldrecorditseffectontheexistingdeferredincometaxaccountsimmediately.Acompanyreportstheeffectasanadjustmenttoincometaxexpenseintheperiodofthechange.RevisionofFutureTaxRatesLO7TaxRateConsiderationsDescribevarioustemporaryandpermanentdifferences.Explaintheeffectofvarioustaxratesandtaxratechangesondeferredincometaxes.Applyaccountingproceduresforalosscarrybackandalosscarryforward.Describethepresentationofincometaxesinfinancialstatements.Indicatethebasicprinciplesoftheasset-liabilitymethod.Afterstudyingthischapter,youshouldbeableto:AccountingforIncomeTaxes19LEARNINGOBJECTIVESIdentifydifferencesbetweenpretaxfinancialincomeandtaxableincome.Describeatemporarydifferencethatresultsinfuturetaxableamounts.Describeatemporarydifferencethatresultsinfuturedeductibleamounts.Explainthenon-recognitionofadeferredtaxasset.Describethepresentationofincometaxexpenseintheincomestatement.Netoperatingloss(NOL)=tax-deductibleexpensesexceedtaxablerevenues.Taxlawspermittaxpayerstousethelossesofoneyeartooffsettheprofitsofotheryears(losscarrybackandlosscarryforward).ACCOUNTINGFORNETOPERATINGLOSSESLO8LossCarrybackBack2yearsandforward20yearsLossesmustbeappliedtoearliestyearfirstLO8NETOPERATINGLOSSESILLUSTRATION19-29LossCarrybackProcedureLossCarryforwardMayelecttoforgolosscarrybackandCarryforwardlosses20yearsLO8NETOPERATINGLOSSESILLUSTRATION19-30LossCarryforwardProcedureIllustration:GrohInc.hasnotemporaryorpermanentdifferences.Grohexperiencesthefollowing.LO8LossCarrybackExample$110,000LO8LossCarrybackExampleLO8LossCarrybackExampleJournalEntryfor2015:IncomeTaxRefundReceivable 110,000 BenefitDuetoLossCarryback(IncomeTaxExpense)

110,000Illustration:GrohInc.reportstheaccountcreditedontheincomestatementfor2014asshown.LO8LossCarrybackExampleILLUSTRATION19-31RecognitionofBenefitoftheLossCarrybackintheLossYearLO8Inadditiontorecordingthe110,000BenefitDuetoLossCarryback,GrohInc.recordsthetaxeffectofthe$200,000losscarryforwardasadeferredtaxassetof$80,000assumingthattheenactedfuturetaxrateis40percent.Theentryismadeasfollows:LossCarryforwardExampleLO8Entrytorecognizethebenefitofthelosscarryforward:Carryforward(Recognition)DeferredTaxAsset

80,000 BenefitDuetoLossCarryforward

80,000Thetwoaccountscreditedarecontraincometaxexpenseitems,whichGrohpresentsonthe2014incomestatementshown.LO8ILLUSTRATION19-32RecognitionoftheBenefitoftheLossCarrybackandCarryforwardintheLossYearCarryforward(Recognition)For2015,assume