intermediate accounting spiceland 5th 6th 7th edition solution Chap016.docx

intermediate accounting spiceland 5th 6th 7th edition solution Chap016.docx

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intermediateaccountingspiceland5th6th7theditionsolutionChap016

Chapter16AccountingforIncomeTaxes

QuestionsforReviewofKeyTopics

Question16-1

Incometaxexpenseiscomprisedofboththecurrentandthedeferredtaxconsequencesofeventsandtransactionsalreadyrecognized.Specifically,itincludes（a）theincometaxthatispayablecurrentlyand（b）thechangeinthedeferredtaxliability（orasset）.Apparently,inthesituationdescribed,temporarydifferencesrequireda$4.4millionincreaseinthedeferredtaxliability,a$4.4milliondecreaseinthedeferredtaxasset,orsomecombinationofthetwo.

Question16-2

Temporarydifferencesbetweenthereportedamountofanassetorliabilityinthefinancialstatementsanditstaxbasisareprimarilycausedbyrevenues,expenses,gains,andlossesbeingincludedintaxableincomeinayearearlierorlaterthantheyearinwhichtheyarerecognizedforfinancialreportingpurpose,althoughthereareother,lesscommon,eventsthatcancausethesetemporarydifferences.Sometemporarydifferencescreatedeferredtaxliabilitiesbecausetheyresultintaxableamountsinsomefutureyear（s）whentherelatedassetsarerecoveredortherelatedliabilitiesaresettled（whenthetemporarydifferencesreverse）.Anexampleisthereceivablecreatedwheninstallmentsalegrossprofitisrecognizedforfinancialreportingpurposes.Whenthisassetisrecovered,taxableamountsareproducedbecausetheinstallmentsalegrossprofitisthenrecognizedfortaxpurposes.Sometemporarydifferencescreatedeferredtaxassetsbecausetheyresultindeductibleamountsinsomefutureyear（s）whentherelatedassetsarerecoveredortherelatedliabilitiesaresettled（whenthetemporarydifferencesreverse）.Anexampleistheliabilitycreatedwhenestimatedwarrantyexpenseisrecognizedforfinancialreportingpurposes.Whenthisliabilityissettled,deductibleamountsareproducedbecausethewarrantycostisthendeductedfortaxpurposes.Thedeferredtaxliabilityorasseteachyearisthetaxratetimesthetemporarydifferencebetweenthefinancialstatementcarryingamountofthereceivableorliabilityanditstaxbasis.

Question16-3

Futuredeductibleamountsmeanthattaxableincomewillbedecreasedrelativetopretaxaccountingincomeinoneormorefutureyears.Twoexamplesare（a）estimatedexpensesthatarerecognizedonincomestatementswhenincurred,butdeductedontaxreturnsinlateryearswhenactuallypaidand（b）revenuesthataretaxedwhencollected,butarerecognizedonincomestatementsinlateryearswhenactuallyearned.Thesesituationshavefavorabletaxconsequencesthatarerecognizedasdeferredtaxassets.

Question16-4

Deferredtaxassetsarerecognizedforalldeductibletemporarydifferencesandoperatinglosscarryforwards.However,adeferredtaxassetisthenreducedbyavaluationallowanceifitis“morelikelythannot”thatsomeportionortheentiredeferredtaxassetwillnotberealized.Thedecisionastowhetheravaluationallowanceisneededshouldbebasedontheweightofallavailableevidence.

AnswerstoQuestions（continued）

Question16-5

Nontemporaryor“permanent”differencesarecausedbytransactionsandeventsthatunderexistingtaxlawwillneveraffecttaxableincomeortaxespayable.Someprovisionsofthetaxlawsexemptcertainrevenuesfromtaxationandprohibitthedeductionofcertainexpenses.Provisionsofthetaxlaws,insomeotherinstances,dictatethattheamountofarevenuethatistaxableorexpensethatisdeductiblepermanentlydiffersfromtheamountreportedintheincomestatement.Permanentdifferencesaredisregardedwhendeterminingboththetaxpayablecurrentlyandthedeferredtaxeffect.

Question16-6

Examplesofnontemporaryor“permanent”differencesare:

•Interestreceivedfrominvestmentsinbondsissuedbystateandmunicipalgovernments（nottaxable）

•Investmentexpensesincurredtoobtaintax-exemptincome（nottaxdeductible）

•Lifeinsuranceproceedsuponthedeathofaninsuredexecutive（nottaxable）

•Premiumspaidforlifeinsurancepolicies（nottaxdeductible）

•Compensationexpensepertainingtosomeemployeestockoptionplans（nottaxdeductible）

•Expensesduetoviolationsofthelaw（nottaxdeductible）

•PortionofdividendsreceivedfromU.S.corporationsthatisnottaxableduetothe“dividendsreceiveddeduction”

•Taxdeductionfordepletionofnaturalresources（percentagedepletion）thatpermanentlyexceedstheincomestatementdepletionexpense（costdepletion）

Question16-7

Adeferredtaxliability（orasset）isbasedonenactedtaxratesandlaws.Hudsonshouldusethe35%rate,thecurrentlyenactedtaxratethatwillbeeffectiveintheyear（s）thetemporarydifferencereverses.Calculationsarenotbasedonanticipatedlegislationthatwouldalterthecompany’staxrate.

Question16-8

Whenachangeinataxlaworrateoccurs,adeferredtaxliabilityorassetmustbeadjustedtoreflecttheamounttobepaidorrecoveredinthefuture.Ifadeferredtaxliabilitywasestablishedwiththeexpectationthatthefuturetaxableamountwouldbetaxedat34%,itwouldnowbeadjustedtoreflecttaxationat36%instead.Theusualpracticeofrecalculatingthedesiredbalanceinadeferredtaxliabilityeachperiodandcomparingthatamountwithanypreviouslyexistingbalanceautomaticallytakesintoaccounttaxratechanges.Theeffectisreflectedinoperatingincome（adjustmenttoincometaxexpense）intheyearoftheenactmentofthechangeinthetaxlaworrate.

AnswerstoQuestions（continued）

Question16-9

Theincometaxbenefitofeitheranoperatinglosscarrybackoranoperatinglosscarryforwardisrecognizedforaccountingpurposesintheyeartheoperatinglossoccurs.Thenetafter-taxoperatinglossreflectsthereductionofpasttaxesfromthelosscarrybackorfuturetaxsavingsthatthelosscarryforwardisexpectedtocreate.

Anoperatinglosscarryforwardcreatesfuturedeductibleamounts,soadeferredtaxassetisrecognizedforanoperatinglosscarryforward.Thedeferredtaxassetisthenreducedbyavaluationallowanceifitis“morelikelythannot”thatsomeportionorallofthedeferredtaxassetwillnotberealizedduetoinsufficienttaxableincomeexpectedinthecarryforwardyears.

Question16-10

Deferredtaxassetsanddeferredtaxliabilitiesarenotreportedindividually,butcombinedinsteadintoanetcurrentamountandanetnoncurrentamount.Eachisreportedaseitheranasset–ifdeferredtaxassetsexceeddeferredtaxliabilities,orasaliability–ifdeferredtaxliabilitiesexceeddeferredtaxassets.

Deferredtaxassetsanddeferredtaxliabilitiesareclassifiedaseithercurrentornoncurrentaccordingtohowtherelatedassetsorliabilitiesareclassifiedforfinancialreporting.Forinstance,adeferredtaxliabilityarisingfromestimatedwarrantyexpenseswouldbeclassifiedascurrentifthewarrantyliabilityisclassifiedascurrent.Adeferredtaxassetorliabilitythatisnotrelatedtoaspecificassetorliabilityshouldbeclassifiedaccordingtowhentheunderlyingtemporarydifferenceisexpectedtoreverse.

Question16-11

Regardingdeferredtaxamountsreportedinthebalancesheet,disclosurenotesshouldindicate（a）thetotalofalldeferredtaxliabilities,（b）thetotalofalldeferredtaxassets,（c）thetotalvaluationallowancerecognizedfordeferredtaxassets,（d）thenetchangeinthevaluationallowance,and（e）theapproximatetaxeffectofeachtypeoftemporarydifference（andcarryforward）.

Question16-12

Pertainingtotheincometaxexpensereportedintheincomestatement,disclosurenotesshouldindicate（a）thecurrentportionofthetaxexpense（ortaxbenefit）,（b）thedeferredportionofthetaxexpense（ortaxbenefit）,withseparatedisclosureofamountsattributableto（c）theportionthatdoesnotincludetheeffectofthefollowingseparatelydisclosedamounts,（d）operatinglosscarryforwards,（e）adjustmentsduetochangesintaxlawsorrates,（f）adjustmentstothebeginning-of-the-yearvaluationallowanceduetorevisedestimates,（g）investmenttaxcredits.

AnswerstoQuestions（concluded）

Question16-13

FIN48createsahigherstandardthattaxbenefitsmustmeetbeforetheycanberecognizedinacompany’sfinancialstatements. Theidentifiedtaxpositionmusthavea"more-likely-than-not"likelihood-amorethan50percentchance-ofbeingsustainedonexamination.Theconceptof"beingsustained"meansbeingcapableofmakingitthroughthefinallevelofappealorlitigationonthetaxposition'stechnicalmerits,assumingtheexaminingjurisdictionshavefullknowledgeofallfactsandcircumstances.

Onceacompanyconcludesthataparticulartaxpositionhasa"morelikelythannot"chanceofbeingsustained,itshoulddealwithsteptwointheFASB'smodelbymeasuringthedollaramountofbenefittorecognize.Specifically,itshouldfollowtheBoard'snew"cumulativeprobability"methodologyunderwhichcompanieswillrecordinthefinancialstatementsthelargestbenefitthatcumulativelyisgreaterthan50-percentlikelytobesustained.

Question16-14

Intraperiodtaxallocationmeansthetotalincometaxobligationforareportingperiodisallocatedamongtheincomestatementitemsthatgaverisetotheincometax.Thefollowingitemsshouldbereportednetoftheirrespectiveincometaxeffects:

•Income（orloss）fromcontinuingoperations

•Discontinuedoperations

•Extraordinaryitems

Question16-15

DespitethesimilarapproachesforaccountingfortaxationunderIASNo.12,“IncomeTax,”andU.S.GAAP,differencesinreportedamountsfordeferredtaxesareamongthemostfrequentbetweenthetworeportingapproaches.Thereasonisthatagre