Accounting for Income Tax

10146 Words Oct 13th, 2012 41 Pages

Accounting for Income Taxes

After careful study of this chapter, you will be able to: 1. 2. 3. 4. 5. 6. 7. 8. 9. Understand permanent and temporary differences. Explain the conceptual issues regarding interperiod tax allocation. Record and report deferred tax liabilities. Record and report deferred tax assets. Explain an operating loss carryback and carryforward. Account for an operating loss carryback. Account for an operating loss carryforward. Apply intraperiod tax allocation. Classify deferred tax liabilities and assets.


Overview and Definitions 1. Significant differences normally exist between a company 's pretax financial income and taxable income because generally accepted accounting
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A corporation 's pretax financial income may be less than its taxable income if the income tax laws require that revenue received in advance of being earned must be included in taxable income when received or if the tax laws disallow the deduction of accrued expense until actually paid. The following will result in temporary differences that generate a deferred tax asset (future deductible amounts) because a corporation 's taxable income is greater than pretax financial income in the year in which the temporary difference originates. As a result, future taxable income will be less than future pretax financial income when the item reverses in future years. Method Used for Book Purposes Prepaid rent, interest, royalties, or other revenue received in advance included in income when earned Gains on sales and leasebacks are reported over the life of the lease contract Warranty expense, bad debt expense, compensation expense for stock option plans, and losses on inventories in a later

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