PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACnthia J. !oone, Ph.D., CPACopyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.Accounting for Income TaxesChapter 1616-2The Internal Revenue Code is the set of rules for preparing tax returns.The Internal Revenue Code is the set of rules for preparing tax returns.Financial statement income tax expense.Financial statement income tax expense.IRS income taxes payable.IRS income taxes payable.GAA is the set of rules for preparing financial statements.GAA is the set of rules for preparing financial statements.!sually. . . Results in . . .The ob"ective of accounting for income taxes is to recogni#e a deferred tax liability or deferred tax assetfor the tax conse$uences of amounts that %ill become taxable or deductible in future years as a result of transactions or events that already have occurred.The ob"ective of accounting for income taxes is to recogni#e a deferred tax liability or deferred tax assetfor the tax conse$uences of amounts that %ill become taxable or deductible in future years as a result of transactions or events that already have occurred.Deferred Tax Assets and Deferred Tax LiabilitiesResults in . . .16-3Temporary DiferencesThis results in temporary differences.The difference in the rules for computing bet%een pretax accounting income &according to GAA' and taxable income &according to the IRS' often causes amounts to be reported in different years.The difference in the rules for computing bet%een pretax accounting income &according to GAA' and taxable income &according to the IRS' often causes amounts to be reported in different years.16-4Temporary differences %ill reverse in one or more future periods.Temporary differences %ill reverse in one or more future periods.Temporary DiferencesAccounting Income ( Taxable IncomeFuture Taxable Amounts)eferred Tax *iabilityAccounting Income + Taxable IncomeFuture )eductible Amounts)eferred Tax Asset16-5Deferred Tax LiabilitiesA temporary diference originates in one period and reverses, or turns around, in one or more subsequent periods.Kent Land Management reported pretax accounting income in 2013, 2014, and 2015 of $100 million, plus additional 2013 income of $40 million from installment sales of property.However, the installment sales income is reported on the tax return when collected, in 2014 ($10 million) and 2015 ($30 million). The enacted tax rate is 40% each year. 16-6Deferred Tax LiabilitiesCalculate income tax that is currently payable,-.// 0 1/2 3 -1/Calculate change in deferred tax liability,&-1/ 0 1/2' 3 -.4Combine the t%o to get the income tax expense, -1/ 5 -.4 3 -64Calculate income tax that is currently payable,-.// 0 1/2 3 -1/Calculate change in deferred tax liability,&-1/ 0 1/2' 3 -.4Combine the t%o to get the income tax expense, -1/ 5 -.4 3 -64In"ome ta# e#$ense%&In"ome ta# $aable '(De)erred ta# liabilit *&16-7The FASBs Balance Sheet Approach16-8Types of Temporary DiferencesDeferred tax liabilities result in taxable amounts in the future.Deferred tax liabilities result in taxable amounts in the future.Deferred tax assets result in deductible amounts in the future.Deferred tax assets result in deductible amounts in the future.16-9Deferred Tax LiabilitiesA temporary diference originates in one period and reverses, or turns around, in one or more subsequent periods.Courts +em$orar Ser,i"es re$orted $reta# a""ountin- in"ome in .(*/, .(*', .(*%, and .(*& o) 0*(( million. In .(*/, an asset was a"1uired )or 0*(( million. +he asset is de$re"iated )or )inan"ial re$ortin- $ur$oses o,er )our ears on a strai-ht2line basis 3no residual ,alue4. 5or ta# $ur$oses the asset6s "ost is dedu"ted 3b MAC!S4 o,er .(*/7.(*& as )ollows: 0// million, 0'' million, 0*% million, and 08 million. 9o other de$re"iable assets were a"1uired. +he ena"ted ta# rate is '(: ea"h ear.16-10Deferred Tax LiabilitiesCalculate income tax that is currently payable,-78 0 1/2 3 -94.:Calculate change in deferred tax liability, &-86 ; -99' 0 1/2 3 -9.8Combine the t%o to get the income tax expense, -94.: 5 -9.8 3 -1/Calculate income tax that is currently payable,-78 0 1/2 3 -94.:Calculate change in deferred tax liability, &-86 ; -99' 0 1/2 3 -9.8Combine the t%o to get the income tax expense, -94.: 5 -9.8 3 -1/Journal entr at the end o) .(*/In"ome ta# e#$ense'(.(In"ome ta# $aable /&.8De)erred ta# liabilit /..16-11Deferred Tax LiabilitiesCalculate income tax that is currently payable,-:. 0 1/2 3 -98.1Calculate change in deferred tax liability, &&-86 ; -11' 0 1/2'' 3 -in"ome ta# re)und.?De)erred ta# asset .(In"ome ta# bene)it2o$eratin- loss '?16-27Balance Sheet ClassifcationA deferred tax asset that is not related to a specic asset or liability should be classied according to when the underlying temporary diference is expected to reverse. )eferred tax assetsEliabilities are classified as current or noncurrent based on the classification of the related asset or liability.16-28Disclosure Notes!eferred Tax Assets and !eferred Tax "iabilities