ACCT 553
CHAPTER 19
Accounting for Income Taxes
CHAPTER REVIEW
Introduction
1. Chapter 19 addresses the issues related to accounting for income taxes. Taxable income is computed in accordance with prescribed tax regulations and rules, whereas accounting income is measured in accordance with generally accepted accounting principles.
2. (S.O. 1) Due to the fact that tax regulations and generally accepted accounting principles differ in many ways, taxable income and financial income frequently differ. The following represent examples of events that can result in such differences: (a) depreciation computed on a straight-line basis for financial reporting purposes and on an accelerated basis for tax purposes, (b) income recognized on the accrual basis for financial reporting purposes and on the installment basis for tax purposes, and (c) warranty costs recognized in the period incurred for financial reporting purposes and when they are paid for tax purposes.
*Note: All asterisked (*) items relate to material contained in the Appendix to the chapter.
3. The items discussed in paragraph 2 above can result in temporary differences between the amounts reported for book purposes and those reported for tax purposes. A temporary difference is the difference between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable amounts (increase in taxable income) or deductible amounts (decrease in taxable income) in future years when the reported amount of the asset is recovered or when the reported amount of the liability is settled. When the book amount of an asset or liability differs from the tax basis as a result of a temporary difference, the future tax effects on taxable income must be reported in the current financial statements.
Deferred Tax Liability
4. (S.O. 2) A deferred tax liability is the amount of deferred tax consequence attributable to the temporary differences that will
Accounting for Income Taxes
CHAPTER REVIEW
Introduction
1. Chapter 19 addresses the issues related to accounting for income taxes. Taxable income is computed in accordance with prescribed tax regulations and rules, whereas accounting income is measured in accordance with generally accepted accounting principles.
2. (S.O. 1) Due to the fact that tax regulations and generally accepted accounting principles differ in many ways, taxable income and financial income frequently differ. The following represent examples of events that can result in such differences: (a) depreciation computed on a straight-line basis for financial reporting purposes and on an accelerated basis for tax purposes, (b) income recognized on the accrual basis for financial reporting purposes and on the installment basis for tax purposes, and (c) warranty costs recognized in the period incurred for financial reporting purposes and when they are paid for tax purposes.
*Note: All asterisked (*) items relate to material contained in the Appendix to the chapter.
3. The items discussed in paragraph 2 above can result in temporary differences between the amounts reported for book purposes and those reported for tax purposes. A temporary difference is the difference between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable amounts (increase in taxable income) or deductible amounts (decrease in taxable income) in future years when the reported amount of the asset is recovered or when the reported amount of the liability is settled. When the book amount of an asset or liability differs from the tax basis as a result of a temporary difference, the future tax effects on taxable income must be reported in the current financial statements.
Deferred Tax Liability
4. (S.O. 2) A deferred tax liability is the amount of deferred tax consequence attributable to the temporary differences that will