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1 Simulation 1 AICPA 2009 Release Deferred Taxes Simulation1-1

2 Simulation1-4

3 Stanhope, Inc. C corporation 33% 2 2 Stanhope $11,000 2 $5,000 $15, $21,000 $8,000 GAAP GAAP Simulation1-5

4 Simulation1-6

5 Situation A B B C D ; A1+B1 Simulation1-7

6 <Accounting for Deferred Taxes Tab > $21,000 $6 930 GAAP Stanhope $21,000 $21,000 GAAP $21,000 $0 $21,000 write-off 33% $21,000 33% $6,930 GAAP $767,000 $253,110 Stanhope GAAP GAAP $767,000 GAAP $1,510,000 $2,277,000 33% $767,000 33% $253,110 Simulation1-8

7 $8,000 GAAP $8,000 $8,000 33% =$8,000 33%=$2,640 Simulation1-9

8 Topic 1 Income Statement / Deferred Taxes Major Components of an Income and Retained Earnings Statement Comprehensive Income Accounting for Income Taxes Interperiod Tax Allocation Temporary Differences Permanent Differences Deferred Tax Liabilities Deferred Tax Assets KNOW THIS! Balance Sheet Presentation Operating Loss Carrybacks and Carryforwards DeVry/Becker Educational Development Corp. All rights reserved.

9 SUMMARY NOTES I. PRESENTATION ORDER OF THE MAJOR COMPONENTS OF AN INCOME AND RETAINED EARNINGS STATEMENT REPORTED ON INCOME STATEMENT A. INCOME (OR LOSS) FROM CONTINUING OPERATIONS (REPORT GROSS; THEN NET OF TAX) Income from continuing operations includes operating activities (i.e., revenues, costs of goods sold, selling expenses, and administrative expenses), non-operating activities (e.g., other revenues and gains and other expenses and losses), and income taxes. B. INCOME (OR LOSS) FROM DISCONTINUED OPERATIONS (REPORT "NET OF TAX") Discontinued Operations The component has been disposed of, or the component is classified as held for sale. The operations and cash flows of the component have been or will be eliminated from ongoing operations The entity will not have no significant continuing involvement The (normal) loss from discontinued operations can consist of three "elements": (1) an impairment loss, Loss from discontinued operations (2) income/loss from actual operations, and (3) a gain/loss on disposal. All of these amounts are included in discounted operations in the period in which they occur. C. EXTRAORDINARY ITEMS (REPORT "NET") Extraordinary items are presented net of tax and include items that are unusual in nature and occur infrequently. Extraordinary Items (a) The abandonment of, or damage to, a plant due to an infrequent earthquake or an infrequent flood (b) An expropriation of a plant by the government (c) A prohibition of a product line by a newly enacted law or regulation DeVry/Becker Educational Development Corp. All rights reserved.

10 REPORTED ON STATEMENT OF RETAINED EARNINGS D. CHANGE IN ACCOUNTING PRINCIPLE (REPORT "NET OF TAX") 2005 D. Income Statement Statement of Retained Earnings The cumulative effect of a change in accounting principle is presented net of tax. It is the cumulative effect (calculated as of the beginning of the period of implementation of the new method) of a change from one acceptable method of accounting to another ("GAAP to GAAP") because the new method presents the financial information more fairly than the old method. Change in accounting principle, Change in accounting estimate, Change in reporting entity, Error correction Topic9 II. COMPREHENSIVE INCOME Comprehensive income includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners. Comprehensive income is net income plus other comprehensive income. Other comprehensive income includes: 2006 Pension Pension funded status changes minimum liability adjustments Unrealized gains and losses on available-for-sale securities (Topic7 ) Foreign currency items Effective portion of cash flow hedges III. ACCOUNTING FOR INCOME TAXES A. INTERPERIOD TAX ALLOCATION 1. Total income tax expense (GAAP income tax expense) or benefit for the year is the sum of: a. Current income tax expense/benefit, and b. Deferred income tax expense/benefit. 2. Current income tax expense/benefit is equal to the taxable income for the current year, multiplied by the current tax rate. 3. Deferred income tax expense/benefit is equal to temporary differences multiplied by the future tax rate, or the change in deferred tax liability or asset account on the balance sheet from the beginning of the current year to the end of the current year (called the "Balance Sheet Approach"). Deferred tax asset / liability enacted tax rate tax rate DeVry/Becker Educational Development Corp. All rights reserved.

11 4. Thus, total income tax expense/benefit can be depicted as follows: TAX RETURN TEMPORARY DIFFERENCE FINANCIAL STATEMENT x CURRENT TAX RATE DR CURRENT TAX EXP CR CURRENT LIABILITY x FUTURE (ENACTED) TAX RATE DR DEFERRED TAX EXP + CR DEFERRED LIABILITY OR = DR DEFERRED ASSET CR DEFERRED TAX BENEFIT TOTAL TAX EXPENSE B. DIFFERENCES There are two types of differences between pretax GAAP financial income and taxable income. All differences are either permanent differences or temporary differences. 1. Permanent Differences a. Permanent differences do not affect the deferred tax computation. They only affect the current tax computation. These differences affect only the period in which they occur. They do not affect future financial or taxable income. b. Permanent differences are items of revenue and expense that either: (1) Enter into pretax GAAP financial income, but never enter into taxable income (e.g., interest income on state or municipal obligations, life insurance, proceeds/expense). (2) Enter into taxable income, but never enter into pretax GAAP financial income (e.g., dividends received deduction). Permanent differences Interest received on state or municipal bonds Life insurance proceeds on officers (key man life insurance) Life insurance premium paid when the corporation is beneficiary Payment of penalty or fine DRD: Dividends received deduction Nondeductible portion of meal and entertainment expense 2. Temporary Differences Temporary differences are the differences between the tax basis of an asset or liability and its reported amount in the financial statement that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively DeVry/Becker Educational Development Corp. All rights reserved.

12 MULTIPLE CHOICE QUESTIONS 1. Moran On May 15, 20X1, Moran Inc. approved a plan to dispose of a component of its business. It is expected that the sale will occur on February 1, 20X2, at a selling price of $500,000, which was the current fair value of the component. During 20X1, disposal costs incurred by Moran totaled $15,000. The component had actual orestimated operating losses as follows: 1/1/20X1 to 5/14/20X1 $130,000 5/15/20X1 to 12/31/20X1 50,000 1/1/20X2 to 1/31/20X2 15,000 The carrying amount of the component on May 15, 20X1 was $850,000. Before income taxes, what amount should Moran report for discontinued operations in its 20X1 Income Statement? 1. $545, $365, $15, $380, Ray Corporation Ray Corporation had the following transactions during 20X1: A $100,000 gain on reacquisition and retirement of long-term bonds. Ray frequently acquires and retires its debt. A $500,000 loss on the disposal of its entire retail store business. Ray has never abandoned any of its various businesses previously. It plans to operate only as a wholesaler in the future. A $100,000 loss on the abandonment of assets that are no longer being used. In its 20X1 income statement, what would be the total amount to be included in extraordinary items? 1. $100, $600, $400, $ DeVry/Becker Educational Development Corp. All rights reserved.