Accounting for Income Tax
CHAPTER
Accounting for Income Taxes
OBJECTIVES
After careful study of this chapter, you will be able to: 1. 2. 3. 4. 5. 6. 7. 8. 9. Understand permanent and temporary differences. Explain the conceptual issues regarding interperiod tax allocation. Record and report deferred tax liabilities. Record and report deferred tax assets. Explain an operating loss carryback and carryforward. Account for an operating loss carryback. Account for an operating loss carryforward. Apply intraperiod tax allocation. Classify deferred tax liabilities and assets.
19-1
SYNOPSIS
Overview and Definitions 1. Significant differences normally exist between a company 's pretax financial income and taxable income because generally accepted accounting principles are used to measure pretax financial income while the Internal Revenue Code and state tax laws are used to determine taxable income for purposes of paying income taxes. These differences stem from the different objectives of generally accepted accounting principles and of tax laws. The objective of generally accepted accounting principles is to provide information useful to present and potential users in making rational investment, credit, or similar decisions. However, the objectives of the Internal Revenue Code are to raise revenue to operate the government and to assist the government in achieving social or economic goals.
Interperiod Income Tax Allocation: Basic Issues 2. Differences between a corporation 's pretax financial income and taxable income are a result of either permanent or temporary differences. The three types of permanent differences are: (a) revenues that are recognized for financial reporting purposes but are never taxable, such as interest received by a corporation on an investment in municipal bonds and proceeds received from life insurance policies on key officers; (b) expenses that are recognized for financial reporting purposes but are never deductible in calculating taxable income, such as
Accounting for Income Taxes
OBJECTIVES
After careful study of this chapter, you will be able to: 1. 2. 3. 4. 5. 6. 7. 8. 9. Understand permanent and temporary differences. Explain the conceptual issues regarding interperiod tax allocation. Record and report deferred tax liabilities. Record and report deferred tax assets. Explain an operating loss carryback and carryforward. Account for an operating loss carryback. Account for an operating loss carryforward. Apply intraperiod tax allocation. Classify deferred tax liabilities and assets.
19-1
SYNOPSIS
Overview and Definitions 1. Significant differences normally exist between a company 's pretax financial income and taxable income because generally accepted accounting principles are used to measure pretax financial income while the Internal Revenue Code and state tax laws are used to determine taxable income for purposes of paying income taxes. These differences stem from the different objectives of generally accepted accounting principles and of tax laws. The objective of generally accepted accounting principles is to provide information useful to present and potential users in making rational investment, credit, or similar decisions. However, the objectives of the Internal Revenue Code are to raise revenue to operate the government and to assist the government in achieving social or economic goals.
Interperiod Income Tax Allocation: Basic Issues 2. Differences between a corporation 's pretax financial income and taxable income are a result of either permanent or temporary differences. The three types of permanent differences are: (a) revenues that are recognized for financial reporting purposes but are never taxable, such as interest received by a corporation on an investment in municipal bonds and proceeds received from life insurance policies on key officers; (b) expenses that are recognized for financial reporting purposes but are never deductible in calculating taxable income, such as