Focus on: Deferred Taxes—Module 14
ACCOUNTING FOR INCOME TAXES (ASC 740/FAS 109)
Income Tax Expense
Taxable income = Pretax accounting income
- No temporary differences
- Income tax expense = Current income tax expense
- No deferred tax effect
Taxable income ≠ Pretax accounting income
- Temporary differences
- Income tax expense = Current income tax expense ± Deferred income taxes
Current Income Tax
Current income tax expense = Taxable income × Current tax rate
Current tax liability = Current income tax expense – Estimated payments
Taxable income:
Pretax accounting income (financial statement income) | |
± | Permanent differences |
± | Changes in cumulative amounts of temporary differences |
= | Taxable income |
Permanent and Temporary Differences
Permanent differences
- Nontaxable income (interest income on municipal bonds) and nondeductible expenses (premiums on officers’ life insurance)
- No income tax effect
Temporary differences
- Carrying values of assets or liabilities ≠ tax bases
- May be taxable temporary differences (TTD) or deductible temporary differences (DTD)
- TTD result in deferred tax liabilities, and DTD result in deferred tax assets
Assets
- Financial statement basis > Tax basis = TTD
- Financial statement basis < Tax basis = DTD
Liabilities
- Often it is easier to examine the net effect on income. For example, if straight-line depreciation is used for financial statement purposes and the ...
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