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Wiley CPAexcel Exam Review 2014 Focus Notes: Financial Accounting and Reporting by Ray Whittington

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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

Financial statement basis > Tax basis = DTD
Financial statement basis < Tax basis = TTD
  • 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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