Study notes for Income tax_Ch. 19_part 1_SV

Study notes for Income taxes _Ch. 19_Part I (TV)Accounting for Income TaxesLearning Objectives of this chapter:Accounting for Income taxesAccounting for operating lossesFinancial statement presentation1.Differences between GAAP and IRSGAAP principles--designed to regulate the profession of accounting.IRS rules and principles –designed to facilitate the collection of taxes.GAAP requires companies use accrual method to report revenues and expenses.IRS codes uses a modified cash method to calculate incomeDifferences in Terminology2.Temporary differences and permanent differenceThe differences between book income (in accordance with GAAP rules) and the taxableincome can be temporary or permanent. Many of these differences are temporary (meaning: these differences will eventually reversed in future accounting periods). Some of thesedifferences are permanent (meaning: the differences between GAAP and IRS that’s never going to be resolved, hence there are no deferred tax consequences.)3. 3 things we need to do when a temporary difference exists:Determine 2 incomes: the book income (GAAP) and the taxable income (IRS);Determine 2 tax amount: the tax expense (GAAP) and Taxes payable (IRS);Make the necessary journal entry.4.Two temporary differences: Deferred income liability and deferred income assetDeferred tax liability (DTL): Any temporary difference that in reversing itself causes taxable income to be higher than financial (book) income.Deferred tax asset (DTA): Any temporary difference that in reversing itself causes taxable income to be lower than financial (book) income.(1)DTL Example: Chelsea, Inc. reported revenues of $130,000 in 2012, of which $30,000is from accounts receivable, and expenses of $60,000 in each of its first three years ofoperations. For the $30,000 Accounts receivable, the company collects $20,000 in thesecond year (i.e. year 2013), and $10,000 in the third year (i.e. year 2014). What is theeffect on the accounts of reporting different amounts of revenue for GAAP versus tax?Solution:Tax expense (GAAP) Tax payable (IRS) Deferred tax liability (DTL)Journal entries:Year 2012Year 2013Year 2014Q: Where does the “deferred tax liability” get reported in the financial statements?Balance sheet(end of 2012) Income statement (2012) Assets: Liabilities: RevenueDeferred tax: 12,000 Expense:Income tax payable: 16,000 Income tax expense: 28,000(2)DLA Example: Chelsea, Inc. reported an income (before tax) of $100,000 in each ofthe four years 2012, 2013, 2014 and 2015. In year 2012, the company also hasprepaid/unearned revenue (i.e. received cash from customers) in the amount of $30,000, for which the company will record $10,000 as earned for each of the following three years 2013, 2014 and 2015 by delivering the goods or services to the customers. Whatis the effect on the accounts of reporting different amounts of revenue for GAAP versus tax?Solution:Journal entries:Year 2012Year 2013Year 2014Year 2015(3)A short summary:If book income > taxable income _________________ DTLIf book income < taxable income __________________ DTA5.Practice problems:Ex. 1: Chelsea, Inc. reported an income (before depreciation expense and tax) of $200,000 in each of the four years 2012, 2013, 2014 and 2015. The company uses straight-line method to record depreciation expense for book purposes and accelerated deprecation for tax purpose. Depreciation expense under book accounting is $25,000 for each of the four years, and $33,000, $44,000, $15,000 and $8,000 for those years under tax accounting. What is the effect on the accounts of reporting different amounts of revenue for GAAP versus tax?Solution:E19-1: Starfleet Corporation has one temporary difference at the end of 2012 that will reverse and cause taxable amounts of $55,000 in 2013, $60,000 in 2014, and $75,000 in 2015. Starfleet’s pretax financial income for 2012 is $400,000, and the tax rate is 30% for all years. There are no deferred taxes at the beginning of 2012.Instructionsa)Compute taxable income and income taxes payable for 2012.b)Prepare the journal entry to record income tax expense, deferred income taxes,and income taxes payable for 2012.。