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What are the journal entry accts to record a deferred tax asset, and then the entry to reverse the asset in the following year?
- TO RECORD THE ASSET
- [DR] Deferred Tax Asset
- [DR] Income Tax Expense – Current
- [CR] Income Taxes Payable
- [CR] Deferred Tax Benefit
- TO REVERSE
- [DR] Income Tax Expense – Deferred
- [CR] Deferred Tax Asset
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What are the 8 accounts for which intraperiod tax allocation is used.
- Income from continuing operations
- Discontinued operations
- Accounting principle change (retrospective)
- P – U – F – E - R
- Pension funded status change
- Unrealized gain/loss of AFS securities
- Foreign translation adjustment
- Effective portion of cash flow hedge
- Revaluation surplus (IFRS)
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What constitutes a Permanent difference regarding calculation of taxable income?
- A transaction that will only occur in one year and does not affect future years.
- This will affect current taxable expense, but will not affect deferred taxes.
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What constitutes a Temporary difference regarding calculation of taxable income?
- A transaction that will affect the current, as well as future taxable years.
- This will affect current and deferred taxable expense.
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Name the 8 typical examples of permanent differences
- Tax exempt interest (muni, state)
- Life insurance proceeds on officer’s key man policy
- Life insurance premiums when corporation is beneficiary
- Certain penalties, fines, bribes, kickbacks, etc.
- Nondeductible portion of meal and entertainment expense
- Dividends-received deduction for corporations
- Excess percentage depletion over cost depletion
- Interest expense above the net (taxable) investment income
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Of the following temporary differences, state whether the item will result in a tax liability or asset. (1) bad debt expense using the allowance method, (2) installment sales, (3) amortization of franchise
- (1) Asset
- (2) Liability
- (3) Liability
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Of the following temporary differences, state whether the item will result in a tax liability or asset. (1) Prepaid rent, (2) equity method for income, (3) prepaid expenses
- (1) Asset
- (2) Liability
- (3) Liability
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Of the following temporary differences, state whether the item will result in a tax liability or asset. (1) Warranty expense when using an allowance method, (2) Prepaid Interest, (3) Start-up Expenses
- (1) Asset
- (2) Asset
- (3) Asset
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Of the following temporary differences, state whether the item will result in a tax liability or asset. (1) depreciation expense, (2) percentage completion for long term contract
- (1) Liability
- (2) Liability
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When is a deferred tax liability created: (1) future income tax income > future financial statement income OR (2) vice versa
(1) future income tax income > future financial statement income [we’re paying less this year in income tax and will owe more next year]
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When is a deferred tax asset created: : (1) future income tax income > future financial statement income OR (2) vice versa
(2) future income tax income < future financial statement income [we’ve paid more in income tax this year and will pay less in the future]
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What are the journal entry accts to record a deferred tax liability, and then the entry to reverse the asset in the following year?
- TO RECORD THE LIABILITY
- [DR] Income Tax Expense - Deferred
- [DR] Income Tax Expense – Current
- [CR] Income Taxes Payable
- [CR] Deferred Tax Liability
- TO REVERSE
- [DR] Deferred Tax Liability
- [CR] Income Tax Benefit - Deferred
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How is the Current Tax Liability (aka Current Tax Expense) calculated?
- Taxable Income from the tax return
- x Tax Rate
- = Current tax expense
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How is the Deferred Tax Asset/Liability calculated?
- Temporary differences (if more than one, use the net amount)
- x Future (enacted) tax rate
- = Deferred tax asset or expense
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How is the Total Tax Expense calculated?
- Current tax liability
- + Change in deferred tax liability
- - Change in deferred tax asset
- = Total tax expense
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An entity determines it is probable that it can’t use a deferred tax asset in the future. How is the accounting for this situation different between GAAP and IFRS?
- GAAP: Book the entire asset, and then establish a valuation allowance contra-account
- IFRS: If there’s doubt, don’t book it; book only what you believe will occur
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