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Chapter 16 Accounting for Income Taxes
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QUESTIONS FOR REVIEW OF KEY TOPICS
Question 16–1
Income tax expense is comprised of both the current and the deferred tax
consequences of events and transactions already recognized. Specifically, the
Question 16–2
Temporary differences between the reported amount of an asset or liability in
the financial statements and its tax basis are primarily caused by revenues,
Answers to Questions (continued)
Question 16–3
Future deductible amounts mean that taxable income will be decreased
Question 16–4
Deferred tax assets are recognized for all deductible temporary differences
Question 16–5
Nontemporary or “permanent” differences are caused by transactions and
events that under existing tax law will be removed from accounting income when
Answers to Questions (continued)
Question 16–6
Examples of nontemporary or “permanent” differences are:
• Interest received from investments in bonds issued by state and municipal
governments (not taxable)
Question 16–7
A deferred tax liability (or asset) is based on enacted tax rates and laws.
Answers to Questions (continued)
Question 16–8
When a change in a tax law or rate occurs, a deferred tax liability or asset
must be adjusted to reflect the amount to be paid or recovered in the future. If a
Question 16–9
The income tax benefit of either a net operating loss carryback or a net
operating loss carryforward is recognized for accounting purposes in the year the
Question 16–10
Deferred tax assets and deferred tax liabilities are not reported individually,
but combined instead into a net current amount and a net noncurrent amount.
Answers to Questions (continued)
Question 16–11
Regarding deferred tax amounts reported in the balance sheet, disclosure notes
Question 16–12
Pertaining to the income tax expense reported in the income statement,
disclosure notes should indicate (a) the current portion of the tax expense (or tax
Question 16–13
Step 1: For an uncertain tax benefit to be recognized in a company’s financial
statements, the identified tax position must have a "more-likely-than-not"
16–6 Intermediate Accounting, 8/e
Answers to Questions (concluded)
Question 16–14
Intraperiod tax allocation means the total income tax obligation for a reporting
Question 16–15
Despite the similar approaches for accounting for taxation under IAS No. 12,
BRIEF EXERCISES
Brief Exercise 16–1
Since taxable income is less than pretax accounting income, a future taxable
amount will occur when the temporary difference reverses. This means a deferred
Brief Exercise 16–2
Since tax depreciation to date has been $100,000 more than depreciation for
financial reporting purposes, a future taxable amount will occur when the
16–8 Intermediate Accounting, 8/e
Brief Exercise 16–3
Since taxable income is more than pretax accounting income, a future
deductible amount will occur when the temporary difference reverses. This means
Brief Exercise 16–4
($ in millions)
Income tax expense (to balance) 52
Brief Exercise 16–5
($ in millions)
Income tax expense (to balance) 84
Brief Exercise 16–6
($ in millions)
Income tax expense (to balance) 2
Deferred tax asset ($30 x 40%) 12
Brief Exercise 16–7
Deferred tax assets are recognized for all deductible temporary differences
and net operating loss carryforwards. Deferred tax assets are then reduced by a
16–10 Intermediate Accounting, 8/e
Brief Exercise 16–8
Since taxable income to date has been $40 million less than pretax accounting
income because of the temporary difference, a future taxable amount of $40
Brief Exercise 16–9
Current year Future taxable amount
Pretax accounting income $ 900,000
Permanent difference:
Enacted tax rate 40% 40%
Journal entry
Income tax expense (to balance) 352,000
16–12 Intermediate Accounting, 8/e
Brief Exercise 16–10
($ in 000s)
Current Future
Year Deductible
2016 Amounts Total
2017 2018 2019
Pretax accounting income 291
Journal entry at the end of 2016
Income tax expense (to balance) 117
Brief Exercise 16–11
Superior should reduce its deferred tax liability this year by $4.5 million:
($ in millions)
Brief Exercise 16–12
Because the loss year is Nile.com’s first year of operations, the carryback
option is unavailable. The loss is carried forward.
Journal entry
Brief Exercise 16–13
Because the net operating loss is less than the previous two years taxable
income, AirParts cannot get back all taxes paid those two years. It can reduce
16–14 Intermediate Accounting, 8/e
Brief Exercise 16–14
Taxable income reflects the benefit of the interest being tax-free, so the tax
currently payable is $55 million x 40% or $22 million. But, since it’s more likely
than not that the interest isn’t tax-free, that benefit can’t be recognized in the tax
Brief Exercise 16–15
Intraperiod tax allocation means the total income tax obligation for a reporting
period is allocated among the income statement items that gave rise to the income
tax. The following items should be reported net of their respective income tax
effects:
• Income (or loss) from ordinary, continuing operations.
Brief Exercise 16–16
If Southeast Airlines prepares its financial statements according to IFRS, the
amount of income tax expense that Southeast should report is $65 million x 40%,
16–16 Intermediate Accounting, 8/e
EXERCISES
Exercise 16–1
Requirement 1
Since taxable income is less than pretax accounting income, a future taxable
amount will occur when the temporary difference reverses. This means a deferred
tax liability should be recorded to reflect the future tax consequences of the
temporary difference.
Income tax expense (to balance) 140,000
Requirement 2
In its balance sheet, Alvis will report the $52,500 deferred tax liability among
Exercise 16–2
Requirement 1
($ in millions)
Current Future
Year Taxable
2016 Amount
[total]
Pretax accounting income 45
Temporary difference:
Taxable income (tax return) 40
Enacted tax rate
40% 40%
Deferred Tax Liability
Deferred Tax Liability
Journal entry at the end of 2016
Requirement 2
($ in millions)
Exercise 16–3
($ in millions)
December 31
2016 2017 2018 2019
Depreciable asset (net):
Exercise 16–4
Exercise 16–5
Exercise 16–6
D 1. Accrual of loss contingency; tax-deductible when paid.
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