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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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What are the two most prominent types of uncertain tax positions?
- Taking a tax deduction
- Characterizing income as excludable from taxable income
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What is the two step approach for recognition of a tax benefit on an uncertain tax position?
- Step 1 – Determine if the position should be taken: Yes, if the expected outcome would be more-likely-than-not to be favorable to the entity should it be disputed in the court of last resort.
- Step 2 – Determine how much should be recognized: Use the largest amount of tax benefit that has a greater than 50% likelihood of being realized based on a settlement with the taxing authority.
- Example: $400 savings has a 26% probability, $300 has a 25% probability (51% combined for $400 + $300). Use the $300 amount because that it over the 50% threshold.
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The tax amount on temporary differences resulting in deferred tax must be calculated using which rate?
- The enacted rate(s) for the year(s) that the temporary difference is expected to resolve.
- Not the suggested, proposed, anticipated rate – use the actual legal rate for that particular year.
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How is GAAP different from IFRS for using specific tax rates in future years.
- GAAP: Only use the legal, or enacted rate stated for the future year
- IFRS: May use a rate that is substantially enacted.
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In year 1 a deferred asset/liability acct was initially calculated using the enacted rate at the time.. In year 2 the rate is different than it was during year 1. What adjustments must be made? What are the journal entry accts?
- The previous balances are recalculated and the difference entered in the year of change.
- If a liability is increased
- [DR] Income Tax Expense – Deferred
- [CR] Deferred Tax Liability
- If an asset is decreased
- [DR] Income Tax Expense – Deferred
- [CR] Deferred Tax Asset
- If an asset is increased
- [DR] Deferred Tax Asset
- [CR] Income Tax Benefit – Deferred
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What is a valuation account regarding deferred tax balances?
- When a deferred tax asset probably will not be used completely, the difference between the asset account and what is likely to be used must be established as a Deferred Tax Asset Valuation Allowance
- [DR] Deferred Tax Asset
- [CR] Deferred Tax Asset Valuation Allowance
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An entity has both deferred tax assets and deferred tax liabilities. How are these accounts displayed on the Balance Sheet?
- The two accounts are netted and shown accordingly (either asset or liability) regardless of reversal dates
- Deferred accounts are always non-current
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An entity has an operating loss in year 3 an elects to use the 2 back, 20 forward rule. The entity had positive earnings for years 1, 2, and 4. Assume the loss will cover all earnings for years 1, 2, and most of 4. What journal entry accounts will be used?
- For the refund due for taxes paid in yrs 1 & 2
- [DR] Tax Refund Receivable
- [CR] Tax Benefit
- For the year 4 earnings
- [DR] Deferred Tax Asset
- [CR] Tax Benefit
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The entity has invested in another company and must account for the company using the equity method. How are income and dividends recognized by the entity vs tax reporting?
- The entity recognizes income from the investment, and reduces by dividends
- Tax reporting only recognizes dividends received as income, and then reduces by the dividend deduction
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CALCULATION: Assume the entity owns 25% of CoB and accounts for it using the equity method. Assume CoB net income is $2,400,000, and dividends paid $2,000,000. The entity’s tax rate is 40%. Calculate the temporary and permanent differences and prepare the tax journal entry.
- $600,000 = the income recognized by the entity ($2,400,000 x 25%)
- $500,000 = the dividend received by the entity ($2,000,000 x 25%)
- $400,000 = the amount of the dividend received deduction ($500,000 x 80%)
- $40,000 = current taxes due ($500,000 dividend received - $400,000 DRD = $100,000 x 40% rate = $40,000)
- $100,000 = the difference between income recognized and dividend received. At some time in the future this difference will also be received as a dividend, and it will also receive the 80% DRD discount, leaving $20,000 subject to tax.
- $8,000 = Deferred tax liability ($20,000 from above x 40% rate)
- $48,000 = Total Tax Expense for the Year (current + deferred)
- [DR] Tax Expense – Deferred = $8,000
- [DR] Tax Expense – Current = $40,000
- [CR] Taxes Payable = $40,000
- [CR] Deferred Tax Liability = $8,000
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