financial accounting

ACCOUNTING FOR INCOME TAXES

F 1. Taxable income is a tax accounting term and is also referred to as income before taxes.

F 2. Pretax financial income is the amount used to compute income taxes payable.

T 3. Deferred tax expense is the increase in the deferred tax liability balance from the beginning to the end of the accounting period.

T 4. A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year.

F 5. Deductible amounts cause taxable income to be greater than pretax financial income in the future as a result of existing temporary differences.

T 6. A deferred tax asset represents the increase in taxes refundable in future years as a result of deductible temporary differences existing at the end of the current year.

F 7. A company reduces a deferred tax asset by a valuation allowance if it is probable that it will not realize some portion of the deferred tax asset.

T 8. Companies should consider both positive and negative evidence to determine whether it needs to record a valuation allowance to reduce a deferred tax asset.

F 9. A company should add a decrease in a deferred tax liability to income taxes payable in computing income tax expense.

T 10. Taxable temporary differences will result in taxable amounts in future years when the related assets are recovered.

F 11. Examples of taxable temporary differences are subscriptions received in advance and advance rental receipts.

T 12. Permanent differences do not give rise to future taxable or deductible amounts.

T 13. Companies must consider presently enacted changes in the tax rate that become effective in future years when determining the tax rate to apply to existing temporary differences.

F14. When a change in the tax rate is enacted, the effect is reported as an adjustment to income tax payable in the period of the change.

F 15. Under the loss carryback approach, companies must apply a current year loss to the most recent year first and then to an earlier year.

T 16. The tax effect of a loss carryforward represents future tax savings and results in the recognition of a deferred tax asset.

T 17. A possible source of taxable income that may be available to realize a tax benefit for loss carryforwards is future reversals of existing taxable temporary differences.

T 18. An individual deferred tax asset or liability is classified as current or noncurrent based on the classification of the related asset/liability for financial reporting purposes.
F 19. Companies should classify the balances in the deferred tax accounts on the balance sheet as noncurrent assets and noncurrent liabilities.

F 20. The FASB believes that the deferred tax method is the most consistent method for accounting for income taxes.

Multiple Choice—Computational
Use the following information for questions 52 and 53.

At the beginning of 2015, Pitman Co. purchased an asset for $1,200,000 with an estimated useful life of 5 years and an estimated salvage value of $100,000. For financial reporting purposes the asset is being depreciated using the straight-line method; for tax purposes the double-declining-balance method is being used. Pitman Co.’s tax rate is 40% for 2015 and all future years.

52. At the end of 2015, what are the book basis and the tax basis of the asset? Book basis Tax basis c. $980,000 $720,000 $1,200,000 – [($1,200,000 – $100,000)  5)] = $980,000; $1,200,000 – ($1,200,000  1/5  2) = $720,000.

53. At the end of 2015, which of the following deferred tax accounts and balances is reported on Pitman’s balance sheet? Account _ Balance
b. Deferred tax liability $104,000 ($980,000 – $720,000)  .40 = $104,000 Deferred tax liability.

54. Lehman Corporation purchased a machine on January 2, 2013, for $3,000,000. The machine has an estimated 5-year life with no salvage value. The straight-line method of depreciation is being used for financial statement purposes and the following MACRS amounts will be deducted for tax purposes:
2013 $600,000 2016 $345,000
2014 960,000 2017 345,000
2015 576,000 2018 174,000
Assuming an income tax rate of 30% for all years, the net deferred tax liability that should be reflected on Lehman's balance sheet at December 31, 2014 be Deferred Tax Liability Current Noncurrent
a. $0 $108,000

($960,000 – $600,000) × 30% = $108,000 Noncurrent.

Use the following information for questions 55 through 57.

Mathis Co. at the end of 2014, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:
Pretax financial income $ 800,000
Estimated litigation expense 2,000,000
Installment sales (1,600,000)
Taxable income $ 1,200,000

The estimated litigation expense of $2,000,000 will be deductible in 2016 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $800,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $800,000 current and $800,000 noncurrent. The income tax rate is 30% for all years.

55. The income tax expense is
a. $240,000.

Income taxes payable = ($1,200,000 × 30%) = $360,000 Change in deferred tax liability = ($1,600,000 × 30%) = $480,000 Change in deferred tax asset = ($2,000,000 × 30%) = $600,000 $360,000 + $480,000 – $600,000 = $240,000.

56. The deferred tax asset to be recognized is
d. $600,000 noncurrent.

($2,000,000 × 30%) = $600,000.

57. The deferred tax liability—current to be recognized is
c. $240,000.
($800,000 × 30%) = $240,000..

Use the following information for questions 58 through 60.

Hopkins Co. at the end of 2014, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $1,500,000 Estimated litigation expense 2,000,000 Extra depreciation for taxes (3,000,000) Taxable income $ 500,000
The estimated litigation expense of $2,000,000 will be deductible in 2015 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $1,000,000 in each of the next three years. The income tax rate is 30% for all years.

58. Income taxes payable is

b. $150,000. ($500,000 × 30%) = $150,000.

59. The deferred tax asset to be recognized is
d. $600,000 current.
($2,000,000 × 30%) = $600,000.

60. The deferred tax liability to be recognized is Current Noncurrent
c. $0 $900,000 ($3,000,000 × 30%) = $900,000.

61. Eckert Corporation's partial income statement after its first year of operations is as follows:
Income before income taxes $3,750,000
Income tax expense Current $1,035,000 Deferred 90,000 1,125,000
Net income $2,625,000
Eckert uses the straight-line method of depreciation for financial reporting purposes and accelerated depreciation for tax purposes. The amount charged to depreciation expense on its books this year was $2,400,000. No other differences existed between book income and taxable income except for the amount of depreciation. Assuming a 30% tax rate, what amount was deducted for depreciation on the corporation's tax return for the current year?

d. $2,700,000 (30% × Temporary Difference) = $90,000; Temporary Difference = ($90,000 ÷ 30%) = $300,000; $2,400,000 + $300,000 = $2,700,000.

62. Cross Company reported the following results for the year ended December 31, 2014, its first year of operations: 2014
Income (per books before income taxes) $ 1,500,000
Taxable income 2,400,000
The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2015. What should Cross record as a net deferred tax asset or liability for the year ended December 31, 2014, assuming that the enacted tax rates in effect are 40% in 2014 and 35% in 2015?

b. $315,000 deferred tax asset

($2,400,000 – $1,500,000) × 35% = $315,000 deferred tax asset.

63. In 2014, Krause Company accrued, for financial statement reporting, estimated losses on disposal of unused plant facilities of $2,400,000. The facilities were sold in March 2015 and a $2,400,000 loss was recognized for tax purposes. Also in 2014, Krause paid $100,000 in premiums for a two-year life insurance policy in which the company was the beneficiary. Assuming that the enacted tax rate is 30% in both 2014 and 2015, and that Krause paid $780,000 in income taxes in 2014, the amount reported as net deferred income taxes on Krause's balance sheet at December 31, 2014, should be a

d. $720,000 asset.
($2,400,000 × 30%) = $720,000

64. Horner Corporation has a deferred tax asset at December 31, 2015 of $160,000 due to the recognition of potential tax benefits of an operating loss carryforward. The enacted tax rates are as follows: 40% for 2012–2014; 35% for 2015; and 30% for 2016 and thereafter. Assuming that management expects that only 50% of the related benefits will actually be realized, a valuation account should be established in the amount of:

a. $80,000

$160,000  .50 = $80,000.

65. Watson Corporation prepared the following reconciliation for its first year of operations:
Pretax financial income for 2015 $1,800,000
Tax exempt interest (100,000)
Originating temporary difference (300,000)
Taxable income $1,400,000 The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2015 is 28%. What amount should be reported in its 2015 income statement as the current portion of its provision for income taxes?

a. $392,000

$1,400,000  .28 = $392,000.

Use the following information for questions 66 and 67.

Mitchell Corporation prepared the following reconciliation for its first year of operations:
Pretax financial income for 2015 $ 900,000
Tax exempt interest (75,000)
Originating temporary difference (175,000)
Taxable income $650,000
The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2015 is 35%.

66. What amount should be reported in its 2015 income statement as the deferred portion of income tax expense?
a. $70,000 debit
$175,000 × .40 = $70,000 debit.

67. In Mitchell’s 2015 income statement, what amount should be reported for total income tax expense?
c. $315,000 ($700,000×.35)+($175,000×.40)=$315,000

68. Ewing Company sells household furniture. Customers who purchase furniture on the installment basis make payments in equal monthly installments over a two-year period, with no down payment required. Ewing's gross profit on installment sales equals 40% of the selling price of the furniture.
For financial accounting purposes, sales revenue is recognized at the time the sale is made. For income tax purposes, however, the installment method is used. There are no other book and income tax accounting differences, and Ewing's income tax rate is 30%.
If Ewing's December 31, 2015, balance sheet includes a deferred tax liability of $600,000 arising from the difference between book and tax treatment of the installment sales, it should also include installment accounts receivable of
a. $5,000,000. $600,000 ÷ 30% = $2,000,000 temporary difference $2,000,000 ÷ 40% = $5,000,000.

69. Ferguson Company has the following cumulative taxable temporary differences: 12/31/15 12/31/14 $2,700,000 $1,920,000
The tax rate enacted for 2015 is 40%, while the tax rate enacted for future years is 30%. Taxable income for 2015 is $4,800,000 and there are no permanent differences. Ferguson's pretax financial income for 2015 is

b. $5,580,000. $4,800,000 + ($2,700,000 – $1,920,000) = $5,580,000.

Use the following information for questions 70 through 72.

Lyons Company deducts insurance expense of $126,000 for tax purposes in 2014, but the expense is not yet recognized for accounting purposes. In 2015, 2016, and 2017, no insurance expense will be deducted for tax purposes, but $42,000 of insurance expense will be reported for accounting purposes in each of these years. Lyons Company has a tax rate of 40% and income taxes payable of $108,000 at the end of 2014. There were no deferred taxes at the beginning of 2014.

70. What is the amount of the deferred tax liability at the end of 2014?
a. $50,400
$126,000 × .40 = $50,400

71. What is the amount of income tax expense for 2014?
a. $158,400
$108,000 + ($126,000 × .40) = $158,400 72. Assuming that income taxes payable for 2015 is $144,000, the income tax expense for 2015 would be what amount?
d. $127,200 $144,000 – ($42,000 × .40) = $127,200

Use the following information for questions 73 and 74.

Kraft Company made the following journal entry in late 2014 for rent on property it leases to Danford Corporation.
Cash 120,000 Unearned Rent Revenue 90,000
The payment represents rent for the years 2015 and 2016, the period covered by the lease. Kraft Company is a cash basis taxpayer. Kraft has income tax payable of $184,000 at the end of 2014, and its tax rate is 35%.

73. What amount of income tax expense should Kraft Company report at the end of 2014?
b. $142,000
$184,000 – ($120,000 × .35) = $142,000

74. Assuming the income taxes payable at the end of 2015 is $204,000, what amount of income tax expense would Kraft Company record for 2015?

c. $225,000
$204,000 + ($60,000 × .35) = $225,000

75. The following information is available for Kessler Company after its first year of operations:
Income before taxes $250,000
Federal income tax payable $104,000
Deferred income tax (4,000)
Income tax expense 100,000
Net income $150,000
Kessler estimates its annual warranty expense as a percentage of sales. The amount charged to warranty expense on its books was $85,000. Assuming a 40% income tax rate, what amount was actually paid this year for warranty claims?

d. $75,000 85,000 – ($4,000 ÷ .40) = $75,000

Use the following information for questions 76–78.

At the beginning of 2015; Elephant, Inc. had a deferred tax asset of $10,000 and a deferred tax liability of $15,000. Pre-tax accounting income for 2015 was $750,000 and the enacted tax rate is 40%. The following items are included in Elephant’s pre-tax income:

Interest income from municipal bonds
$ 60,000
Accrued warranty costs, estimated to be paid in 2016
$130,000
Operating loss carryforward
$ 95,000
Installment sales revenue, will be collected in 2016
$ 65,000
Prepaid rent expense, will be used in 2016
$ 30,000

76. What is Elephant, Inc.’s taxable income for 2015?
b. $ 630,000 750,000 – $60,000 + $130,000 – $95,000 – $65,000 – $30,000 = $630,000.

77. Which of the following is required to adjust Elephant, Inc.’s deferred tax asset to its correct balance at December 31, 2015?

d. A debit of $42,000 ($130,000  .40) – $10,000 = $42,000

78. The ending balance in Elephant, Inc’s deferred tax liability at December 31, 2015 is

b. $38,000 ($65,000 + $30,000)  .40 = $38,000

Use the following information for questions 79 and 80.

Rowen, Inc. had pre-tax accounting income of $1,800,000 and a tax rate of 40% in 2015, its first year of operations. During 2015 the company had the following transactions:

Received rent from Jane, Co. for 2016
$64,000
Municipal bond income
$80,000
Depreciation for tax purposes in excess of book depreciation
$40,000
Installment sales revenue to be collected in 2016
$108,000

79. For 2015, what is the amount of income taxes payable for Rowen, Inc?

b. $654,400 $1,800,000 + $64,000 – $80,000 – $40,000 – $108,000 = $1,636,000 $1,636,000  .40 = $654,400.

80. At the end of 2015, which of the following deferred tax accounts and balances is reported on Rowen, Inc.’s balance sheet? Account _ Balance
a. Deferred tax asset $25,600 $64,000  .40 = $25,600 Deferred tax asset 81. Based on the following information, compute 2015 taxable income for South Co. assuming that its pre-tax accounting income for the year ended December 31, 2015 is $345,000. Future taxable Temporary difference (deductible) amount
Installment sales $288,000
Depreciation
$ 90,000
Unearned rent ($300,000)

b. $267,000

$345,000 - $288,000 – $90,000 + $300,000 = $267,000

82. Fleming Company has the following cumulative taxable temporary differences:
12/31/15 12/31/14
$1,280,000 $1,800,000

The tax rate enacted for 2015 is 40%, while the tax rate enacted for future years is 30%. Taxable income for 2015 is $3,200,000 and there are no permanent differences. Fleming’s pretax financial income for 2015 is:
b. $2,680,000 $3,200,000 – ($1,800,000 – $1,280,000) = $2,680,000

83. Larsen Corporation reported $100,000 in revenues in its 2014 financial statements, of which $33,000 will not be included in the tax return until 2015. The enacted tax rate is 40% for 2014 and 35% for 2015. What amount should Larsen report for deferred income tax liability in its balance sheet at December 31, 2014?
a. $11,550 $33,000  .35 = $11,550.

84. Duncan Inc. uses the accrual method of accounting for financial reporting purposes and appropriately uses the installment method of accounting for income tax purposes. Profits of $600,000 recognized for books in 2014 will be collected in the following years: Collection of Profits
2015 $100,000
2016 $200,000
2017 $300,000 The enacted tax rates are: 40% for 2014, 35% for 2015, and 30% for 2016 and 2017. Taxable income is expected in all future years. What amount should be included in the December 31, 2014, balance sheet for the deferred tax liability related to the above temporary difference?

c. $185,000
($100,000  .35) + [($200,000 + $300,000)  .30] = $185,000

85. At December 31, 2014 Raymond Corporation reported a deferred tax liability of $180,000 which was attributable to a taxable type temporary difference of $600,000. The temporary difference is scheduled to reverse in 2018. During 2015, a new tax law increased the corporate tax rate from 30% to 40%. Raymond should record this change by debiting
d. Income Tax Expense for $60,000. 600,000  (.40 – .30) = $60,000 Income Tax Expense

86. Palmer Co. had a deferred tax liability balance due to a temporary difference at the beginning of 2014 related to $900,000 of excess depreciation. In December of 2014, a new income tax act is signed into law that lowers the corporate rate from 40% to 35%, effective January 1, 2016. If taxable amounts related to the temporary difference are scheduled to be reversed by $450,000 for both 2015 and 2016, Palmer should increase or decrease deferred tax liability by what amount?

b. Decrease by $22,500 450,000 × (.35 – .40) = $22,500 decrease

87. A reconciliation of Gentry Company's pretax accounting income with its taxable income for 2014, its first year of operations, is as follows:
Pretax accounting income $3,000,000
Excess tax depreciation (150,000)
Taxable income $2,850,000
The excess tax depreciation will result in equal net taxable amounts in each of the next three years. Enacted tax rates are 40% in 2014, 35% in 2015 and 2016, and 30% in 2017. The total deferred tax liability to be reported on Gentry's balance sheet at December 31, 2014, is
.
b. $50,000. ($50,000 × 35%) + ($50,000 × 35%) + ($50,000 × 30%) = $50,000

88. Khan, Inc. reports a taxable and financial loss of $1,950,000 for 2015. Its pretax financial income for the last two years was as follows:
2013 $900,000
2014 1,200,000
The amount that Khan, Inc. reports as a net loss for financial reporting purposes in 2015, assuming that it uses the carryback provisions, and that the tax rate is 30% for all periods affected, is
.
d. $1,365,000 loss.
1,950,000 – (30% × $1,950,000) = $1,365,000

Use the following information for questions 89 and 90.

Wilcox Corporation reported the following results for its first three years of operation:
2014 income (before income taxes) $ 200,000
2015 loss (before income taxes) (1,800,000)
2016 income (before income taxes) 2,000,000
There were no permanent or temporary differences during these three years. Assume a corporate tax rate of 30% for 2014 and 2015, and 40% for 2016.

89. Assuming that Wilcox elects to use the carryback provision, what income (loss) is reported in 2015? (Assume that any deferred tax asset recognized is more likely than not to be realized.)

d. $(1,100,000) ($200,000 × 30%) = $60,000; $1,600,000 × 40% = $640,000; ($1,800,000 – $60,000 – $640,000) = $1,100,000

90. Assuming that Wilcox elects to use the carryforward provision and not the carryback provision, what income (loss) is reported in 2015?

b. $(1,080,000)

1,800,000 × 40%) = $720,000; $1,800,000 – $720,000 = $1,080,000 91. Rodd Co. reports a taxable and pretax financial loss of $800,000 for 2015. Rodd's taxable and pretax financial income and tax rates for the last two years were:
2013 $800,000 30%
2014 800,000 35%
The amount that Rodd should report as an income tax refund receivable in 2015, assuming that it uses the carryback provisions and that the tax rate is 40% in 2015, is
a. $240,000. ($800,000 × 30%) = $240,000

92. Nickerson Corporation began operations in 2013. There have been no permanent or temporary differences to account for since the inception of the business. The following data are available:
Year
2013
2014
2015
2016
Enacted Tax Rate
45%
40%
35%
30%
Taxable Income
$1,500,000
1,800,000
Taxes Paid
$675,000
720,000
In 2015, Nickerson had an operating loss of $1,860,000. What amount of income tax benefits should be reported on the 2015 income statement due to this loss assuming that it uses the carryback provision?
a. $819,000 ($1,500,000 × .45) + [($1,860,000 – $1,500,000) × .40] = $819,000

Use the following information for questions 93 and 94.

Operating income and tax rates for C.J. Company’s first three years of operations were as follows: Income _ Enacted tax rate
2014 $300,000 35%
2015 ($750,000) 30%
2016 $1,260,000 40%

93. Assuming that C.J. Company opts to carryback its 2015 NOL, what is the amount of income taxes payable at December 31, 2016?

d. $324,000
[$1,260,000 – ($750,000 – $300,000)]  .40 = $324,000

94. Assuming that C.J. Company opts only to carryforward its 2015 NOL, what is the amount of deferred tax asset or liability that C.J. Company would report on its December 31, 2015 balance sheet? Amount _ Deferred tax asset or liability
c. $300,000 Deferred tax asset

$750,000  .40 = $300,000

95. Munoz Corp.'s books showed pretax financial income of $2,700,000 for the year ended December 31, 2015. In the computation of federal income taxes, the following data were considered:
Gain on an involuntary conversion $1,170,000
(Munoz has elected to replace the property within the statutory period using total proceeds.)
Depreciation deducted for tax purposes in excess of depreciation deducted for book purposes 180,000
Federal estimated tax payments, 2015 225,000
Enacted federal tax rate, 2015 30%
What amount should Munoz report as its current federal income tax liability on its December 31, 2015 balance sheet?
a. $180,000 ($2,700,000 – $1,170,000 – $180,000) × 30% = $405,000; $405,000 – $225,000 = $180,000 96. Haag Corp.'s 2015 income statement showed pretax accounting income of $1,500,000. To compute the federal income tax liability, the following 2015 data are provided:
Income from exempt municipal bonds $ 60,000
Depreciation deducted for tax purposes in excess of depreciation deducted for financial statement purposes 120,000
Estimated federal income tax payments made 300,000
Enacted corporate income tax rate 30%
What amount of current federal income tax liability should be included in Hagg's December 31, 2015 balance sheet?
a. $ 96,000 ($1,500,000 – $60,000 – $120,000) × 30% = $396,000; $396,000 – $300,000 = $96,000 97. On January 1, 2015, Gore, Inc. purchased a machine for $1,350,000 which will be depreciated $135,000 per year for financial statement reporting purposes. For income tax reporting, Gore elected to expense $150,000 and to use straight-line depreciation which will allow a cost recovery deduction of $120,000 for 2015. Assume a present and future enacted income tax rate of 30%. What amount should be added to Gore's deferred income tax liability for this temporary difference at December 31, 2015?

c. $40,500 ($150,000 + $120,000 – $135,000) × 30% = $40,500

98. On January 1, 2015, Piper Corp. purchased 40% of the voting common stock of Betz, Inc. and appropriately accounts for its investment by the equity method. During 2015, Betz reported earnings of $720,000 and paid dividends of $240,000. Piper assumes that all of Betz's undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 30%. Ignore the dividend-received deduction. Piper's current enacted income tax rate is 25%. The increase in Piper's deferred income tax liability for this temporary difference is

d. $ 57,600. ($720,000 – $240,000) × 40% = $192,000; $192,000 × 30% = $57,600

99. Foltz Corp.'s 2014 income statement had pretax financial income of $250,000 in its first year of operations. Foltz uses an accelerated cost recovery method on its tax return and straight-line depreciation for financial reporting. The differences between the book and tax deductions for depreciation over the five-year life of the assets acquired in 2014, and the enacted tax rates for 2014 to 2018 are as follows: Book Over (Under) Tax Tax Rates
2014 $(50,000) 35%
2015 (65,000) 30%
2016 (15,000) 30%
2017 60,000 30%
2018 70,000 30%
There are no other temporary differences. In Foltz's December 31, 2014 balance sheet, the noncurrent deferred income tax liability and the income taxes currently payable should be
Noncurrent Deferred Income Taxes
Income Tax Liability Currently Payable
d. $15,000 $70,000 ($50,000 × 30%) = $15,000; ($250,000 – $50,000) × 35% = $70,000 100. Didde Corp. prepared the following reconciliation of income per books with income per tax return for the year ended December 31, 2015:
Book income before income taxes $1,800,000 Add temporary difference Construction contract revenue which will reverse in 2016 160,000
Deduct temporary difference Depreciation expense which will reverse in equal amounts in each of the next four years (640,000)
Taxable income $1,320,000
Didde's effective income tax rate is 34% for 2015. What amount should Didde report in its 2015 income statement as the current provision for income taxes?

b. $448,800 ($1,320,000 × 34%) = $448,800

101. In its 2014 income statement, Cohen Corp. reported depreciation of $1,850,000 and interest revenue on municipal obligations of $350,000. Cohen reported depreciation of $2,750,000 on its 2014 income tax return. The difference in depreciation is the only temporary difference, and it will reverse equally over the next three years. Cohen's enacted income tax rates are 35% for 2014, 30% for 2015, and 25% for 2016 and 2017. What amount should be included in the deferred income tax liability in Hertz's December 31, 2014 balance sheet?

a. $240,000 ($300,000 × 30%) + ($300,000 × 25%) + ($300,000 × 25%) = $240,000

102. Dunn, Inc. uses the accrual method of accounting for financial reporting purposes and appropriately uses the installment method of accounting for income tax purposes. Installment income of $1,800,000 will be collected in the following years when the enacted tax rates are: Collection of Income Enacted Tax Rates
2014 $180,000 35%
2015 360,000 30%
2016 540,000 30%
2017 720,000 25%
The installment income is Dunn's only temporary difference. What amount should be included in the deferred income tax liability in Dunn's December 31, 2015 balance sheet?
a. $450,000 ($360,000 × 30%) + ($540,000 × 30%) + ($720,000 × 25%) = $450,000 103. For calendar year 2014, Kane Corp. reported depreciation of $1,200,000 in its income statement. On its 2014 income tax return, Kane reported depreciation of $1,800,000. Kane's income statement also included $225,000 accrued warranty expense that will be deducted for tax purposes when paid. Kane's enacted tax rates are 30% for 2014 and 2015, and 24% for 2016 and 2017. The depreciation difference and warranty expense will reverse over the next three years as follows: Depreciation Difference Warranty Expense
2015 $240,000 $ 45,000
2016 210,000 75,000
2017 150,000 105,000 $600,000 $225,000
These were Kane's only temporary differences. In Kane's 2014 income statement, the deferred portion of its provision for income taxes should be

c. $101,700. ($240,000 – $45,000) × 30% = $58,500; ($210,000 – $75,000) × 24% = $32,400; ($150,000 – $105,000) × 24% = $10,800; $58,500 + $32,400 + $10,800 = $101,700

104. Wright Co., organized on January 2, 2014, had pretax accounting income of $640,000 and taxable income of $2,080,000 for the year ended December 31, 2014 The only temporary difference is accrued product warranty costs which are expected to be paid as follows:
2015 $480,000
2016 240,000
2017 240,000
2018 480,000
The enacted income tax rates are 35% for 2014, 30% for 2015 through 2017, and 25% for 2018. If Wright expects taxable income in future years, the deferred tax asset in Wright's December 31, 2014 balance sheet should be

c. $408,000.

($480,000 + $240,000 + $240,000) × 30% = $288,000; $480,000 × 25% = $120,000; $288,000 + $120,000 = $408,000

BE. 19-105—Computation of taxable income.
The records for Bosch Co. show this data for 2015:
Gross profit on installment sales recorded on the books was $420,000. Gross profit from collections of installment receivables was $280,000.
Life insurance on officers was $3,800.
Machinery was acquired in January for $300,000. Straight-line depreciation over a ten-year life (no salvage value) is used. For tax purposes, MACRS depreciation is used and Bosch may deduct 14% for 2015.
Interest received on tax exempt Iowa State bonds was $9,000.
The estimated warranty liability related to 2015 sales was $21,600. Repair costs under warranties during 2015 were $13,600. The remainder will be incurred in 2016.
Pretax financial income is $600,000. The tax rate is 30%.

BE. 19-105 (cont.)
Instructions
(a) Prepare a schedule starting with pretax financial income and compute taxable income.
(b) Prepare the journal entry to record income taxes for 2015.

Solution 19-105
(a) Pretax financial income $600,000 Permanent differences Life insurance 3,800 Tax-exempt interest (9,000) Temporary differences Installment sales ($420,000 – $280,000) (140,000) Extra depreciation ($42,000 – $30,000) (12,000) Warranties ($21,600 – $13,600) 8,000 Taxable income $450,800

(b) Income Tax Expense [$135,240 + ($45,600 – $2,400)] 178,440 Deferred Tax Asset (30% × $8,000) 2,400 Deferred Tax Liability (30% × $152,000) 45,600 Income Taxes Payable (30% × $450,800) 135,240

BE. 19-106—Future taxable and deductible amounts.
Define temporary differences, future taxable amounts, and future deductible amounts.
Solution 19-106
Temporary differences are differences between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable amounts or deductible amounts in future years.

Future taxable amounts increase taxable income in future years and cause a deferred tax liability to be recorded. Future deductible amounts decrease taxable income in future years and cause a deferred tax asset to be recorded.

BE. 19-107—Deferred income taxes.
Pole Co. at the end of 2015, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:

Pretax financial income $ 420,000 Extra depreciation taken for tax purposes (1,050,000) Estimated expenses deductible for taxes when paid 890,000 Taxable income $ 260,000
Use of the depreciable assets will result in taxable amounts of $350,000 in each of the next three years. The estimated litigation expenses of $890,000 will be deductible in 2018 when settlement is expected.

Instructions
(a) Prepare a schedule of future taxable and deductible amounts.
(b) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2015, assuming a tax rate of 40% for all years.

Solution 19-107
(a) 2016 2017 2018 Total Future taxable (deductible) amounts Extra depreciation $350,000 $350,000 $350,000 $1,050,000 Litigation (890,000) (890,000)

(b) Income Tax Expense ($104,000 + $420,000 – $356,000) 168,000 Deferred Tax Asset ($890,000 × 40%) 356,000 Deferred Tax Liability ($1,050,000 × 40%) 420,000 Income Taxes Payable ($260,000 × 40%) 104,000

Ex. 19-108—Deferred income taxes.
Hunt Co. at the end of 2015, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 750,000 Estimated warranty expenses deductible for taxes when paid 1,200,000 Extra depreciation (1,650,000) Taxable income $ 300,000

Estimated warranty expense of $800,000 will be deductible in 2016, $300,000 in 2017, and $100,000 in 2018. The use of the depreciable assets will result in taxable amounts of $550,000 in each of the next three years.

Instructions
(a) Prepare a table of future taxable and deductible amounts.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2015, assuming an income tax rate of 40% for all years.

Solution 19-108
(a) 2016 2017 2018 Total Future taxable (deductible) amounts Warranties $(800,000) $(300,000) $(100,000) $(1,200,000) Excess depreciation 500,000 500,000 500,000 1,650,000

(b) Income Tax Expense [$180,000 + ($660,000 – $420,000)] 300,000 Deferred Tax Asset ($1,200,000 × 40%) 480,000 Deferred Tax Liability ($1,650,000 × 40%) 660,000 Income Taxes Payable ($300,000 × 40%) 120,000

Ex. 19-109—Recognition of deferred tax asset.
(a) Describe a deferred tax asset.
(b) When should a deferred tax asset be reduced by a valuation allowance?

Solution 19-109
(a) A deferred tax asset is the deferred tax consequences attributable to deductible temporary differences and operating loss carryforwards.
(b) A deferred tax asset should be reduced by a valuation allowance if, based on all available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. More likely than not means a level of likelihood that is at least slightly more than 50%.

Ex. 19-110—Permanent and temporary differences.
Listed below are items that are treated differently for accounting purposes than they are for tax purposes. Indicate whether the items are permanent differences or temporary differences. For temporary differences, indicate whether they will create deferred tax assets or deferred tax liabilities. 1. Investments accounted for by the equity method. 2. Advance rental receipts. 3. Fine for polluting. 4. Estimated future warranty costs. 5. Excess of contributions over pension expense. 6. Expenses incurred in obtaining tax-exempt revenue. 7. Installment sales. 8. Excess tax depreciation over accounting depreciation. 9. Long-term construction contracts. 10. Premiums paid on life insurance of officers (company is the beneficiary).

Solution 19-110 1. Temporary difference, deferred tax liability. 2. Temporary difference, deferred tax asset. 3. Permanent difference. 4. Temporary difference, deferred tax asset. 5. Temporary difference, deferred tax liability. 6. Permanent difference. 7. Temporary difference, deferred tax liability. 8. Temporary difference, deferred tax liability. 9. Temporary difference, deferred tax liability. 10. Permanent difference.

Ex. 19-111—Permanent and temporary differences.
Indicate and explain whether each of the following independent situations should be treated as a temporary difference or a permanent difference.
(a) For accounting purposes, a company reports revenue from installment sales on the accrual basis. For income tax purposes, it reports the revenues by the installment-sales method, deferring recognition of gross profit until cash is collected. (b) Pretax accounting income and taxable income differ because 80% of dividends received from U.S. corporations was deducted from taxable income, while 100% of the dividends received was reported for financial statement purposes.
(c) Estimated warranty costs (covering a three-year warranty) are expensed for accounting purposes at the time of sale but deducted for income tax purposes when paid.

Solution 19-111
(a) Temporary difference. This difference in the timing of revenue recognition for pretax financial income and taxable income will initially increase pretax financial income, but will increase taxable income by the amount of deferred gross profits as cash is collected in subsequent years. Assuming the estimate as to collectibility of installment receivables is valid, the total amounts reported as gross profits for accounting purposes and for tax purposes will be equal over the life of a group of installment receivables. The time lag between the accrual for accounting purposes and the recognition for tax purposes will result in credit entries to a company's deferred tax liability as long as installment sales are level or increasing. The credit entries related to particular installment receivables will be "drawn down," or reversed, however, when the receivables are collected.

(b) Permanent difference. This difference in pretax financial income and taxable income will never reverse because present tax laws allow a company that owns stock in another U.S. corporation to deduct 80% of the dividends it receives from that company. Taxes will not be paid on the dividends deducted and there are no tax consequences for those dividends, even though they are recognized as income for book purposes.

(c) Temporary difference. The full estimated three years of warranty expenses reduce the current year's pretax financial income, but will reduce taxable income in varying amounts each year as paid. Assuming the estimate for each warranty is valid, the total amounts deducted for accounting and for tax purposes will be equal over the three-year period for each warranty. This is an example of an expense that, in the first period, reduces pretax financial income more than taxable income and, in later years, reverses and reduces taxable income without affecting pretax financial income.

Ex. 19-112—Temporary differences.
There are four types of temporary differences. For each type: (1) indicate the cause of the difference, (2) give an example, and (3) indicate whether it will create a taxable or deductible amount in the future.

Solution 19-112
(a) Revenues or gains are taxable after they are recognized in pretax financial income. Examples are installment sales, long-term construction contracts, and the equity method of accounting for investments. They result in future taxable amounts. (b) Revenues or gains are taxable before they are recognized in pretax financial income. Examples are subscriptions received in advance and rents received in advance. They result in future deductible amounts.
(c) Expenses or losses are deductible before they are recognized in pretax financial income. Examples are extra depreciation, prepaid expenses, and pension funding in excess of pension expense. They result in future taxable amounts.
(d) Expenses or losses are deductible after they are recognized in pretax financial income. Examples are warranty expenses, estimated litigation losses, and unrealized holding losses. They result in future deductible amounts.

Ex. 19-113—Operating loss carryforward.
In 2014, its first year of operations, Kimble Corp. has a $800,000 net operating loss when the tax rate is 30%. In 2015, Kimble has $350,000 taxable income and the tax rate remains 30%.

Instructions
Assume the management of Kimble Corp. thinks that it is more likely than not that the loss carryforward will not be realized in the near future because it is a new company (this is before results of 2015 operations are known).

(a) What are the entries in 2014 to record the tax effects of the loss carryforward?
(b) What entries would be made in 2015 to record the current and deferred income taxes and to recognize the loss carryforward? (Assume that at the end of 2013 it is more likely than not that the deferred tax asset will be realized.)

Solution 19-113
(a) Deferred Tax Asset ($800,000 × 30%) 240,000 Benefit Due to Loss Carryforward 240,000

Benefit Due to Loss Carryforward 240,000 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value 240,000

(b) Income Tax Expense ($350,000 × 30%) 105,000 Deferred Tax Asset 105,000

Allowance to Reduce Deferred Tax Asset to Expected Realizable Value 105,000 Benefit Due to Loss Carryforward 105,000

Pr. 19-114—Differences between accounting and taxable income and the effect on deferred taxes.
The following differences enter into the reconciliation of financial income and taxable income of Abbott Company for the year ended December 31, 2014, its first year of operations. The enacted income tax rate is 30% for all years. Pretax accounting income $700,000 Excess tax depreciation (360,000) Litigation accrual 70,000 Unearned rent revenue deferred on the books but appropriately recognized in taxable income 60,000 Interest income from New York municipal bonds (20,000) Taxable income $450,000

1. Excess tax depreciation will reverse equally over a four-year period, 2015-2018.
2. It is estimated that the litigation liability will be paid in 2018.
3. Rent revenue will be recognized during the last year of the lease, 2018.
4. Interest revenue from the New York bonds is expected to be $20,000 each year until their maturity at the end of 2018.

Instructions
(a) Prepare a schedule of future taxable and (deductible) amounts.
(b) Prepare a schedule of the deferred tax (asset) and liability at the end of 2014.
(c) Since this is the first year of operations, there is no beginning deferred tax asset or liability. Compute the net deferred tax expense (benefit).
(d) Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2014.

Solution 19-114
(a) 2015 2016 2017 2018 Total Future taxable (deductible) amounts: Depreciation $90,000 $90,000 $90,000 $90,000 $360,000 Litigation (70,000) (70,000) Unearned rent (60,000) (60,000)

(b) Future Taxable (Deductible) Deferred Tax Temporary Differences Amounts Tax Rate (Asset) Liability Depreciation $360,000 30% $108,000 Litigation (70,000) 30% $(21,000) Unearned rent (60,000) 30% (18,000) Totals $170,000 $(39,000) $108,000

(c) Deferred tax expense $108,000 Deferred tax benefit (39,000) Net deferred tax expense $69,000

(d) Income Tax Expense ($135,000 + $69,000) 204,000 Deferred Tax Asset 39,000 Deferred Tax Liability 108,000 Income Taxes Payable ($450,000 × 30%) 135,000

Pr. 19-115—Multiple temporary differences.
The following information is available for the first three years of operations for Cooper Company:
1. Year Taxable Income 2014 $500,000 2015 350,000 2016 400,000

2. On January 2, 2014, heavy equipment costing $600,000 was purchased. The equipment had a life of 5 years and no salvage value. The straight-line method of depreciation is used for book purposes and the tax depreciation taken each year is listed below: Tax Depreciation 2014 2015 2016 2017 Total $198,000 $270,000 $90,000 $42,000 $600,000

3. On January 2, 2015, $300,000 was collected in advance for rental of a building for a three-year period. The entire $300,000 was reported as taxable income in 2015, but $200,000 of the $300,000 was reported as unearned revenue at December 31, 2015 for book purposes.

4. The enacted tax rates are 40% for all years.

Instructions
(a) Prepare a schedule comparing depreciation for financial reporting and tax purposes.
(b) Determine the deferred tax (asset) or liability at the end of 2014.
(c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2015.
(d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2015.
(e) Compute the net deferred tax expense (benefit) for 2015.
(f) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2015.

Solution 19-115
(a) Depreciation for Financial Depreciation for Temporary Year Reporting Purposes Tax Purposes Difference 2014 $120,000 $198,000 $ (78,000) 2015 120,000 270,000 (150,000) 2016 120,000 90,000 30,000 2017 120,000 42,000 78,000 2018 120,000 -0- 120,000 $600,000 $600,000 $ -0-
Solution 19-115 (cont.)
(b) 2015 2016 2017 2018 Total Future taxable (deductible) amounts: Depreciation $(150,000) $30,000 $78,000 $120,000 $78,000

Deferred tax liability: $78,000 × 40% = $31,200 at the end of 2014.

(c) 2016 2017 2018 Total Future taxable (deductible) amounts: Depreciation $30,000 $78,000 $120,000 $228,000 Rent (100,000) (100,000) (200,000)

(d) Future Taxable (Deductible) Tax Deferred Tax Temporary Differences Amounts Rate (Asset) Liability Depreciation $228,000 40% $91,200 Rent (200,000) 40% $(80,000) Totals $ 28,000 $(80,000) $91,200

(e) Deferred tax asset at end of 2015 $(80,000) Deferred tax asset at beginning of 2015 -0- Deferred tax (benefit) $(80,000)

Deferred tax liability at end of 2015 $91,200 Deferred tax liability at beginning of 2015 31,200 Deferred tax expense $60,000

Deferred tax (benefit) $(80,000) Deferred tax expense 60,000 Net deferred tax benefit for 2015 $(20,000)

(f) Income Tax Expense ($140,000 – $20,000) 120,000 Deferred Tax Asset 80,000 Deferred Tax Liability 60,000 Income Taxes Payable ($350,000 × 40%) 140,000

Pr. 19-116—Deferred tax asset.
Farmer Inc. began business on January 1, 2014. Its pretax financial income for the first 2 years was as follows:

2014 $240,000 2015 560,000

The following items caused the only differences between pretax financial income and taxable income.

Pr. 19-116 (cont.)
1. In 2014, the company collected $360,000 of rent; of this amount, $120,000 was earned in 2014; the other $240,000 will be earned equally over the 2015–2016 period. The full $360,000 was included in taxable income in 2014.
2. The company pays $10,000 a year for life insurance on officers.
3. In 2015, the company terminated a top executive and agreed to $90,000 of severance pay. The amount will be paid $30,000 per year for 2015–2017. The 2015 payment was made. The $90,000 was expensed in 2015. For tax purposes, the severance pay is deductible as it is paid.

The enacted tax rates existing at December 31, 2014 are:

2014 30% 2016 40% 2015 35% 2017 40%

Instructions
(a) Determine taxable income for 2014 and 2015.
(b) Determine the deferred income taxes at the end of 2014, and prepare the journal entry to record income taxes for 2014.
(c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2015.
(d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2015.
(e) Compute the net deferred tax expense (benefit) for 2015.
(f) Prepare the journal entry to record income taxes for 2015.
(g) Show how the deferred income taxes should be reported on the balance sheet at December 31, 2015.

Solution 19-116
(a) 2014 2015 Pretax financial income $240,000 $560,000 Permanent differences: Life insurance 10,000 10,000 250,000 570,000 Temporary differences: Rent 240,000 (120,000) Severance pay -0- 60,000 Taxable income $490,000 $510,000

(b) 2015 2016 Total Future taxable (deductible) amounts: Rent $(120,000) $(120,000) $(240,000) Tax rate 35% 40% Deferred tax (asset) liability $(42,000) $(48,000) $(90,000) at end of 2014 Income Tax Expense ($147,000 – $90,000) 57,000 Deferred Tax Asset 90,000 Income Taxes Payable ($490,000 × 30%) 147,000
Solution 19-116 (cont.)
(c) 2016 2017 Total Future taxable (deductible) amounts: Rent $(120,000) $(120,000) Severance pay (30,000) $(30,000) (60,000)

(d) Future Taxable (Deductible) Tax Deferred Tax Temporary Difference Amounts Rate (Asset) Liability Rent $(120,000) 40% $(48,000) Severance pay (60,000) 40% (24,000) Totals $(180,000) $(72,000)

(e) Deferred tax asset at end of 2015 $(72,000) Deferred tax asset at beginning of 2015 (90,000) Net deferred tax expense (benefit) for 2015 $(18,000)

(f) Income Tax Expense ($192,500 + $4,000) 196,500 Deferred Tax Asset 18,000 Income Taxes Payable ($510,000 × 35%) 178,500

(g) The deferred income taxes should be reported on the December 31, 2015 balance sheet as follows: Current assets Deferred tax asset ($150,000* × 40%) $60,000 Other assets Deferred tax asset ($30,000 × 40%) $12,000 *$120,000 + $30,000

Pr. 19-117—Interperiod tax allocation with change in enacted tax rates.
Murphy Company purchased equipment for $300,000 on January 2, 2014, its first day of operations. For book purposes, the equipment will be depreciated using the straight-line method over three years with no salvage value. Pretax financial income and taxable income are as follows: 2014 2015 2016
Pretax financial income $224,000 $260,000 $300,000
Taxable income 194,000 260,000 330,000

The temporary difference between pretax financial income and taxable income is due to the use of accelerated depreciation for tax purposes.

Instructions
(a) Prepare the journal entries to record income taxes for all three years (expense, deferrals, and liabilities) assuming that the enacted tax rate applicable to all three years is 30%.
(b) Prepare the journal entries to record income taxes for all three years (expense, deferrals, and liabilities) assuming that the enacted tax rate as of 2014 is 30% but that in the middle of 2015, Congress raises the income tax rate to 35% retroactive to the beginning of 2015.
Solution 19-117
(a) 2014 2015 2016 Total Book depreciation $ 100,000 $100,000 $100,000 $300,000 Tax depreciation 130,000 100,000 70,000 300,000 Temporary difference $(30,000) $ -0- $30,000 $ -0-

2014 Income Tax Expense 67,200 Deferred Tax Liability ($30,000 × .30) 9,000 Income Tax Payable ($194,000 × .30) 58,200

2015 Income Tax Expense 78,000 Income Tax Payable ($260,000 × .30) 78,000

2016 Income Tax Expense 90,000 Deferred Tax Liability 9,000 Income Tax Payable ($330,000 × .30) 99,000

(b) 2014 Income Tax Expense 67,200 Deferred Tax Liability ($40,000 × .30) 9,000 Income Tax Payable ($194,000 × .30) 58,200

2015 Income Tax Expense 92,500 Deferred Tax Liability 1,500* Income Tax Payable ($260,000 × .35) 91,000

2016 Income Tax Expense 105,000 Deferred Tax Liability 10,500 Income Tax Payable ($330,000 × .35) 115,500

2015 *Future taxable amount $30,000 Deferred tax @ 30% 9,000 Deferred tax @ 35% 10,500 Adjustment $ 1,500

IFRS QUESTIONS

True/False Questions

1. Under IFRS an affirmative judgment approach is used for recognizing deferred tax assets up to the amount that is probable to be realized.

2. Under U.S. GAAP, the rate used to compute deferred taxes is either the enacted tax rate, or a substantially enacted tax rate (virtually certain).

3. Under IFRS, a deferred tax liability is classified as current or noncurrent based on the classification of the asset or liability to which it relates.

4. Under IFRS, all tax effects are charged or credited to income.

5. Under IFRS, all potential liabilities associated with uncertain tax positions are recognized.

Answers to True/False:
1. True
2. False
3. False
4. False
5. True

Multiple Choice Questions

6. Which of the following is false regarding accounting for deferred taxes under IFRS?
a. A deferred tax liability is classified as current or noncurrent based on the classification of the asset or liability to which it relates.
7. Jerome Co. has the following deferred tax liabilities at December 31, 2014:

Amount
Related to
$100,000
Installment sales, expected to be collected in 2015
$350,000
Fixed asset, 10-year remaining useful life, 2014 tax depreciation exceeds book depreciation
$90,000
Prepaid insurance related to 2015

What amount would Jerome Co. report as a noncurrent deferred tax liability under IFRS and under U.S. GAAP? IFRS U.S. GAAP

b. $540,000 $350,000

8. With regard to recognition of deferred tax assets, IFRS requires

Approach
Recognition
a.
Affirmative judgment
Recognize an asset up to the amount that is probable to be realized

9. Match the approach, IFRS or U.S. GAAP, with the location where tax effects are reported:

Approach
Location

c.
IFRS
Charge or credit certain tax effects to equity

10. Alice, Inc. has the following deferred tax assets at December 31, 2014:

Amount
Related to
$180,000
Rent revenue collected in advance related to 2015
$75,000
Warranty liability, expected to be paid in 2015
$255,000
Accrued liability related to a lawsuit expected to settle in 2018

What amount would Alice, Inc. report as a current deferred tax asset under IFRS and under U.S. GAAP? _IFRS_ U.S. GAAP
b. $0 $255,000

Short Answer:

11. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with respect to income tax accounting.

1. Both IFRS and U.S. GAAP use the asset and liability approach for recording deferred tax assets. In general, the differences between IFRS and U.S. GAAP involve limited differences in the exceptions to the asset-liability approach, some minor differences in the recognition, measurement and disclosure criteria, and differences in implementation guidance. Following are some key elements for comparison
Under IFRS, an affirmative judgment approach is used by which a deferred tax asset is recognized up to the amount that is probable to be realized. U.S. GAAP uses an impairment approach. In this approach, the deferred tax asset is recognized in full. It is then reduced by a valuation account if it is more likely than not that all or a portion of the deferred tax asset will not be realized.
IFRS uses the enacted tax rate or substantially enacted tax rate (Substantially enacted means virtually certain). For U.S. GAAP the enacted tax rate must be used.
The tax effects related to certain items are reported in equity under IFRS. That is not the case under U.S. GAAP, which charges or credits the tax effects to income.
U.S. GAAP requires companies to assess the likelihood of uncertain tax positions being sustainable upon audit. Potential liabilities must be accrued and disclosed if the position is “more likely than not” to be disallowed. Under IFRS, all potential liabilities must be recognized. With respect to measurement, IFRS uses an expected value approach to measure the tax liability which differs from U.S. GAAP.
The classification of deferred taxes under IFRS is always noncurrent. U.S. GAAP classifies deferred taxes based on the classification of the asset or liability to which it relates.

12. Describe the current convergence efforts of the FASB and IASB in the area of accounting for taxes.

1. The FASB and the IASB have been working to address some of the differences in the accounting for income taxes. Some of the issues under discussion are the term “probable” under IFRS for recognition of a deferred tax asset, which might be interpreted to mean “more likely than not”. If changed, the reporting for impairments of deferred tax assets will be essentially the same between U.S. GAAP and IFRS. In addition, the IASB is considering adoption of the classification approach used in U.S. GAAP for deferred tax assets and liabilities. Also, U.S. GAAP will likely continue to use the enacted tax rate in computing deferred taxes, except in situations where the U.S. taxing jurisdiction is not involved. In that case, companies should use IFRS which is based on enacted rates or substantially enacted tax rates. Finally, the issue of allocation of deferred income taxes to equity for certain transactions under IFRS must be addressed in order to conform to U.S. GAAP which allocates the effects to income.