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    Deferred Taxes

    Uploaded by

    Vikas
    This document discusses accounting for deferred taxes. It explains that tax expense consists of current tax expense plus deferred tax expense. Deferred tax expense arises due to temporary timing differences between tax accounting and book accounting. These timing differences reverse in future periods. The document provides examples of temporary differences that create deferred tax assets or liabilities, which are reported separately from current taxes payable on the balance sheet. It also discusses the use of the asset and liability method to record deferred taxes.

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    Deferred Taxes

    Uploaded by

    Vikas
    144 views30 pages
    This document discusses accounting for deferred taxes. It explains that tax expense consists of current tax expense plus deferred tax expense. Deferred tax expense arises due to temporary timing differences between tax accounting and book accounting. These timing differences reverse in future periods. The document provides examples of temporary differences that create deferred tax assets or liabilities, which are reported separately from current taxes payable on the balance sheet. It also discusses the use of the asset and liability method to record deferred taxes.

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    Deferred Taxes

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    This document discusses accounting for deferred taxes. It explains that tax expense consists of current tax expense plus deferred tax expense. Deferred tax expense arises due to temporary timing differences between tax accounting and book accounting. These timing differences reverse in future periods. The document provides examples of temporary differences that create deferred tax assets or liabilities, which are reported separately from current taxes payable on the balance sheet. It also discusses the use of the asset and liability method to record deferred taxes.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    144 views30 pages

    Deferred Taxes

    Uploaded by

    Vikas
    This document discusses accounting for deferred taxes. It explains that tax expense consists of current tax expense plus deferred tax expense. Deferred tax expense arises due to temporary timing differences between tax accounting and book accounting. These timing differences reverse in future periods. The document provides examples of temporary differences that create deferred tax assets or liabilities, which are reported separately from current taxes payable on the balance sheet. It also discusses the use of the asset and liability method to record deferred taxes.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 30

    Accounting for Deferred Taxes

    Income Tax Expense


    Tax expense for current year consists of:
    Current income tax expense (this years tax bill)
    and
    Deferred income tax expense.

    Income tax expense


    Taxes payable
    Deferred income taxes liability
    1-2

    100
    80
    20

    Book-to-Tax Differences
    Arises because for some items tax accounting
    differs from book (GAAP).
    Taxable income: income reported to tax
    authorities to compute income tax.
    Pretax accounting income = pretax book
    income = income before taxes: income before
    tax under GAAP.

    1-3

    Why Do Book and Taxable Income


    Differ?
    Objective of tax accounting: raise taxes and
    encourage behavior, e.g. accelerated
    depreciation to encourage investment.
    Objective of GAAP/Financial reporting:
    Provide info useful to investors.

    1-4

    Why Do Book and Taxable Income


    Differ?

    Temporary (Timing) Difference


    between Book and Tax
    Differences that reverse in a later period.
    Revenues or expenses that are permitted or
    required to be reported in a different period. e.g.
    depreciation.

    Creates accounting complexities in order to


    match income tax expense to period in which
    revenue or expense item is recognized.

    1-6

    Temporary (Timing) Difference


    between Book and Tax

    Permanent Differences between Book


    and Tax
    Do not reverse in future years.
    Expenses under GAAP that are not deductible.
    (e.g. fines.)
    Revenues excluded from taxable income. (e.g.
    revenue on municipal bonds)
    Does not create accounting issues.

    1-8

    Permanent Differences between Book


    and Tax

    1-9

    Deferred Tax Reporting


    Asset and liability method.
    Deferred Income Taxes: liability account.
    Shown separately from Taxes payable.
    Indicates amount that future tax expense will be
    reduced when differences between book and tax
    reverse.
    Its like Interest free loan from the government.
    Increases as long as company grows.
    1-10

    Deferred Tax Assets


    Temporary differences resulting in Taxable
    income higher than book:
    Subscription receipts recognized when received
    for tax purposes, and when earned for accg
    purposes.

    1-11

    Permanent Deferrals
    Company grows in size.
    Replacement costs of assets increases in
    periods of inflation.

    Tax Rate Changes and Disclosures


    Deferrals recorded based on rates currently in
    tax law.
    Disclosures:
    Deferred tax asset and liability amounts shown
    separately.
    Must be classified appropriately as current or
    noncurrent.

    1-14

    Example 1

    Example 1

    Example 1

    Example 2

    Example 2

    Example 2

    Example 3

    Example 3

    Example 3

    SILVER APPLIANCE COMPANY


    (In Thousands)
    1989
    1990
    1991
    $190.1 $351.9 $526.2
    1.Year-end installment receivables................................
    2.Gross margin % ................................................................
    34.6%
    35.1%
    34.2%
    3.Deferred gross margin (= 1 * 2) ................................65.77 123.52 179.96
    4.Pretax profit, delivery basis ................................ 332.6
    415.3
    478.2
    5.Income taxes, delivery basis (34% of 4)................................
    113.08 141.20 162.59
    6.Pretax profit, installment basis (= 4 - 3 +
    previous years 3) ................................................................
    266.83 357.55 421.76
    7.Income taxes, installment basis (34% of 6) ................................
    90.72 121.57 143.40
    8.Tax deferred (5 - 7)................................................................
    22.36
    19.63 19.19
    9.Cumulative tax deferred ................................................................
    22.36
    41.99
    61.18

    1992
    $559.4
    33.4%
    186.84
    492.5
    167.45

    1993
    $489.1
    32.2%
    157.49
    461.3
    156.84

    485.62
    165.11
    2.34
    63.52

    490.65
    166.82
    (9.98)
    53.54

    B Off Inc.
    Leading pest extermination company in
    Cambridge, Massachussetts.
    Warranty stated that clients would be roach free
    for one year after an extermination treatment or
    their money back.
    Estimated warranty expense was 6% of total
    revenues collected for any given year.
    Tax laws permitted companies offering
    warranties to deduct expenses for tax purposes
    only as they actually incurred.

    Because of special weather conditions, the


    cockroach problem worsened in 2008.
    Prepare proforma income statements for Bug
    off inc. for 2008 through 2010 as they will
    appear in financial reports and in the
    companys tax returns.
    How should the deferred taxes be reported in
    each year.

    Income statement for 2007


    $1,00,000

    Revenues
    Expenses:
    Materials
    Salaries
    Depreciation
    Warranty expense

    $25,000
    35,000
    5,000
    6,000
    71,000

    Income before taxes

    29,000

    Income taxes @ 40%


    Income after taxes

    11,600
    17,400

    Pro Forma Revenues and Expenses


    2008
    $ 2,00,000

    2009
    1,00,000

    2010
    1,00,000

    Materials
    Salaries
    Depreciation
    Warranty expense
    (accrual)

    $ 50,000
    55,000
    5,000
    12,000

    25,000
    35,000
    5,000
    6,000

    25,000
    35,000
    5,000
    6,000

    Warranty (tax return)

    6,000

    12,000

    6,000

    Revenues
    Expenses:

    Expected tax rate

    40%

    40%

    40%

    Revenue

    Financial Reports
    Tax returns
    2008
    2009
    2010
    2008
    2009
    2010
    1,00,000
    1,00,000
    $ 2,00,000
    1,00,000
    1,00,000
    $ 2,00,000

    Expenses:
    Materials
    Salaries
    Depreciation
    Warranty
    expense

    $ 50,000
    55,000
    5,000
    12,000

    25,000
    35,000
    5,000
    6,000

    25,000
    35,000
    5,000
    6,000

    $ 50,000
    55,000
    5,000
    6,000

    25,000
    35,000
    5,000
    12,000

    25,000
    35,000
    5,000
    6,000

    Total
    expenses

    1,22,000

    71,000

    71,000

    1,16,000

    77,000

    71,000

    Income
    before taxes

    78,000

    29,000

    29,000

    84,000

    23,000

    29,000

    Taxes @
    40%

    31,200

    11,600

    11,600

    33,600

    9,200

    11,600

    Journal Entries

    Tax expense (Dr)

    Deferred taxes

    Cash (Cr)

    2008
    2009
    2010

    31,200
    11,600
    11,600

    2400 (Dr)
    2400 (Cr)
    0

    33,600
    9200
    11,600

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