Student Learning Outcomes

Size: px

Start display at page:

Download "Student Learning Outcomes"

Adelia Stokes
6 years ago
Views:

when and how an operating loss carryforward and an operating loss carryback are recognized in the financial statements Explain how deferred tax assets and deferred tax liabilities are reported in a

1 Chapter 16 Accounting for Income Taxes Part 2: The Nuances Intermediate Accounting II Dr. Chula King Student Learning Outcomes Explain how a change in tax rates affects the measurement of deferred tax amounts Determine income tax amounts when multiple temporary differences exist Describe when and how an operating loss carryforward and an operating loss carryback are recognized in the financial statements Explain how deferred tax assets and deferred tax liabilities are reported in a classified balance sheet Recap Deferred Tax Liabilities (DTL): Arise when items of revenue are included in accounting income before being included in taxable income, or items of expense are deducted for tax purposes before being bi expensed dfor accounting purposes. Deferred Tax Assets (DTA): Arise when items of revenue are included in taxable income before being included in accounting income, or items of expense are expensed for accounting purposes before they are deducted for tax purposes. 1

2 Tax Rate Considerations Deferred tax assets and deferred tax liabilities should be determined based on currently enacted tax rates that will be effective in the year(s) the temporary difference reverses. If a change in the tax law or the tax rate occurs, the deferred tax asset or deferred tax liability must be adjusted to reflect that change. Multiple Temporary Differences The existence of multiple temporary differences does not change any of the principles related to a single difference Categorize all temporary differences according to whether they will create future taxable amounts (DTL), or future deductible amounts (DTA) Balance in DTL = Future tax rate x Total of future taxable amounts Balance in DTA = Future tax rate x Total of future deductible amounts Net Operating Loss Net Operating Loss (NOL) is negative taxable income; tax deductible expenses exceed taxable revenue Tax laws allow companies to use NOLs to offset taxable income in earlier or subsequent periods Carryback: NOL used to offset earlier taxable income; Tax refund Carryfoward: NOL used to offset future taxable income; Reduced taxes payable in future year(s); creates Deferred Tax Asset 2

3 Application of NOL Carryback Period -2-1 Current Year Carryforward Period The NOL may first be applied against taxable income from two previous years, starting first with the earlier year. Unused NOL may be carried forward for 20 years. For Example During 2013, Apex, Inc., reported an operating loss of $125 million for financial reporting and tax purposes. The enacted tax rate is for 2013 is 40%. Taxable income, tax rates, and income taxes paid in the two previous years were as follows: Taxable Income Taxable Rates Income Taxes Paid 2011 $20 million 35% $ 7 million million 40% 22 million For Example (continued) Prior Years Current Year Taxable Income/Operating Loss $20 $55 $(125) Loss Carryback 2011 (20) 20 Loss Carryback 2012 (55) 55 Balance $(50) Future Deductible Amounts (Total) Loss Carryforward 50 $(50) Balance $-0- Enacted Tax Rates 35% 40% 40% 40% Taxes Payable (refundable) $(7) $(22) $-0- Deferred Tax Asset $(20) 3

4 Journal Entry Income Tax Receivable 29 Deferred Tax Asset 20 Income Tax Benefit NOL 49 For Example During 2013, its first year of operation, Apex, Inc., reported an operating loss of $125 million for financial reporting and tax purposes. The enacted tax rate is 40%. Carryforward amount (future deductible amount) = $(125) million Deferred Tax Asset = 40% x $125 million = $50 million Deferred Tax Asset 50 Income Tax Benefit NOL 50 Balance Sheet Classification Deferred tax assets and deferred tax liabilities are classified as current or noncurrent based on the classification of the related asset or liability that gave rise to the deferred tax asset or deferred tax liability If not related to a specific asset or liability, then the deferred tax asset or deferred tax liability should be classified according to when the underlying temporary difference is expected to reverse. 4

5 Balance Sheet Classification - Netting Current deferred tax assets netted with current deferred tax liabilities Noncurrent deferred tax assets netted with noncurrent deferred tax liabilities The Next Step Exercises 3, 4, 5, 6, 7, 10, 11, 14, 15, 17, 18, 25 Problems 1, 3, 5, 7, 9 5

Student Learning Outcomes

Chapter 12 Investments Part 2: Investor has Significant Influence Intermediate Accounting II Dr. Chula King Student Learning Outcomes Explain what constitutes significant influence by the investor Demonstrate