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TEMPORARY AND PERMANENT
DIFFERENCES
Kent Land Management reported pretax income in 2016, 2017, and 2018 of $100
million except for an additional income of $40 million from installment sales and
$5 million interest from investments in municipal bonds in 2016. The
installment sales income is reported for tax purposes in 2017 ($10 million) and
2018 ($30 million). The enacted tax rate is 40% each year.
($ in millions)
Current Future Future
Year Taxable Taxable
2016 Amounts Amounts
2017 2018 [total]
Accounting income 145
Permanent difference:
T16-17
1-22 Intermediate Accounting, 8/e
WHEN ENACTED TAX RATES DIFFER
When a phased-in change in rates is scheduled to occur, the
specific tax rates of each future year are multiplied by the
amounts reversing in each of those years. The total is the
Current Future Future
($ in millions) Year Taxable Taxable
2016 Amounts Amounts
2017 2018 [total]
Accounting income 145
Permanent difference:
CHANGES IN TAX LAWS OR RATES
Tax laws sometimes change. If a change in a tax law or rate
occurs, the deferred tax liability or asset must be adjusted.
The effect is reflected in operating income in the year of the
($ in millions)
Current Future
Year Taxable
2017 Amount
2018
Accounting income 100
Temporary difference:
T16-19
1-24 Intermediate Accounting, 8/e
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Non-Tax Differences Affect Taxes. Despite the similar
approaches for accounting for taxation under IAS 12,
“Income Tax,” and U.S. GAAP, differences in reported
T16-20
MULTIPLE TEMPORARY DIFFERENCES
2016
During 2016, its first year of operations, Eli-Wallace Distributors reported pretax
2. Depreciation is reported by the straight-line method on an asset with a four-year
useful life. On the tax return, deductions for depreciation will be more than
straight-line depreciation the first two years but less than straight-line
depreciation the next two years ($ in millions):
Income Statement Tax Return Difference
2016 $50 $66 $(16)
3. Estimated warranty expense that will be deductible on the tax return when
actually paid during the next two years. Estimated deductions are as follows ($
in millions):
Income Statement Tax Return Difference
2016 $7 $7
T16-21
1-26 Intermediate Accounting, 8/e
MULTIPLE TEMPORARY DIFFERENCES-2016
($ in millions)
Future
Taxable Future Future
Current (Deductible) Taxable Deductible
Year Amounts Amounts Amounts
2016 2017 2018 2019 [total] [total]
Accounting income 200
Temporary differences:
Deferred tax liability 10
Deferred tax asset (2.8)
Deferred tax Deferred tax
T16-22
MULTIPLE TEMPORARY DIFFERENCES-2017
($ in millions)
Future
Taxable Future Future
Current (Deductible) Taxable Deductible
Year Amounts Amounts Amounts
2016 2017 2018 2019 [total]‡ [total]‡
Accounting income 200
Temporary differences:
58 (4)
Deferred tax Deferred
liability tax asset
Ending balances (balances currently needed): $23.2 $1.6
Journal entry at the end of 2017
Income tax expense (to balance) 80.0
T16-23
1-28 Intermediate Accounting, 8/e
NET OPERATING LOSSES (NOLs)
A net operating loss (NOL) can be carried back two years and
forward 20 years:
Carryforward up to 20 years
Tax laws permit a choice. A company can elect to carry an
NOL CARRYFORWARD
During 2016, its first year of operations, American
Laminating Corporation reported an operating loss of $125
million for financial reporting and tax purposes. The enacted
tax rate is 40%.
($ in millions) Current Future
Year Deductible
2016 Amounts
[total]
Operating loss (125)
Deferred tax asset:
Ending balance (balance currently needed) $50
Journal entry at the end of 2016
T16-25
1-30 Intermediate Accounting, 8/e
NOL CARRYBACK
During 2016, American Laminating Corporation reported an
operating loss of $125 million. The enacted tax rate is 40% for
2016.
Taxable Income
Income Tax Rates Taxes Paid
2014 $20 million 35% $7 million
($ in millions) Current Future
Prior Years Year Deductible
2014 2015 2016 Amounts
[total]
Operating loss (125)
Deferred tax asset:
Ending balance (balance currently needed) $20
T16-26
BALANCE SHEET CLASSIFICATION
➢ Classified as either current or noncurrent according to how the
related assets or liabilities are classified for financial reporting.
➢ Net current amount and the net noncurrent amount.
Warren Properties, Inc. had future taxable amounts and future deductible amounts
relating to temporary differences between the tax bases of the assets and liabilities
indicated below and their financial reporting amounts:
($ in millions)
Classifi- Future Deferred
cation Taxable Tax (Asset)
Related Balance current-C (Deductible) Tax Liability
Sheet Account noncurrent-N Amounts Rate C N
Receivable – installment sales C 10 x 40% 4
BALANCE SHEET PRESENTATION:
Current Assets:
