Intermediate Financial Accounting Kieso Chapter 19 Outline

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Chapter 19: Accounting for Income Taxes

Fundamentals of Accounting for Income Taxes

* Intro
* Pretax Financial Income- income before taxes, income for financial reporting purposes, income for BOOK purposes * Determine according to GAAP
* Taxable Income- amount used to compute income taxes payable * Determine using Internal Revenue Code (tax code)
* Differences arise for a simple reason, for financial reporting purposes companies use the full accrual method to report revenues * For tax purposes, use a modified cash basis
* Future Taxable Amounts and Deferred Taxes
* Temporary difference- difference between tax basis of an asset or liability and its reported (carrying or book) amount in the financial statements, which will result in taxable amounts or deductible amounts in the future * Taxable amounts increase taxable income during future years * Deductible amounts decrease taxable income in future years * Deferred Tax Liability

* Deferred Tax Liability (taxable temporary differences)- represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year * Income tax expense has two components

* Current tax expense- amount of income taxes payable for the period * Deferred tax expense- increase in the deferred tax liability and balance form the beginning to the end of an account period * Summary of Income Tax Accounting Objectives

1. To recognize the amount of taxes payable or refundable for the current year 2. To recognize deferred tax liabilities and assets for the future tax consequences of events already recognized in the financial statements or tax returns * Future Deductible Amounts and Deferred Taxes

* Future deductible amounts- cause taxable income to be less than pretax financial income in the future as a result of an existing temporary difference * Deferred Tax Asset
* Deferred tax asset (deductible temporary differences)- represents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences existing at the end of the current year * Deferred tax benefit results from the increase in the deferred tax asset from the beginning to the end of the accounting period * It is a negative component of income tax expense

* Deferred Tax Asset- Valuation Allowance
* Based on available evidence, a company should reduce a deferred tax asset by a valuation allowance if it is more likely than not that it will not realize some portion or all of the deferred tax asset (>50%)

Income Tax ExpenseXX
Allowance to Reduce Deferred Tax XX
Asset to Expected Realizable Value

* Simultaneously establishes a valuation allowance to recognize the reduction in the carrying amount of the deferred tax asset (contra account) * Account is evaluated at the end of each accounting period * Income Statement Presentation

* In the income statement or notes of the financial statements, a company should disclose both current and deferred tax expense * Specific Differences
* Taxable Amounts in future years [revenues/gains]
* Credit Sales
* % of completion method contracts
* Equity method investments
* Unrealized holding gains
* Deductible Amounts in future years [revenues/gains]
* Product warranty liabilities
* Estimated liabilities
* Litigation accruals
* Bad debt expense
* Stock-based compensation expense
* Unrealized holding losses
* Deductible Amounts in Future years [expenses]
* Subscriptions received in advance
* Advance rental receipts
* Sales and leasebacks
* Prepaid contracts
* Taxable Amounts in future years [Expenses]
* Depreciable property, intangibles...
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