Term
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Definition
| Book income includes all earned inflows of net assets, even inflows not immediately convertible into cash, and it reflects expenses as they accrue, not just when they are paid. |
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Term
| Income Tax expense, income tax provision, provision for income taxes |
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Definition
| All refer to the amount presented as an expense in the income statement |
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Term
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Definition
Current liability representing the amount owed to taxing authorities.
Sometimes referred to as the total amount of tax that must be paid related to income from a given year. |
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Term
| Originating temporary difference |
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Definition
| When revenue or expense item that causes book income to be more (less) than taxable income initially is called an originating temporary difference. |
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Term
| Reversing temporary difference |
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Definition
| When book income is less (more) than taxable income in future periods |
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Term
| Tax goal of value-maximizing firms |
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Definition
Minimize the discounted present value of their future tax payments.
Assuming tax rates do not change, each dollar of tax deduction today is more valuable than a dollar of tax deduction in the future. |
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Term
| Example of change in temporary difference that creates a DTL |
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Definition
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Term
| Example of change in temporary difference that creates a DTA |
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Definition
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Term
| DTL Income Statement approach |
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Definition
Deferred tax liabilities are recognized to reflect future tax payments related to the amounts previously recognized in pre-tax income.
Focus on matching recognition of income tax expense in the same period as the one in which the related pre-tax income was recognized. |
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Term
| DTA Income Statement Approach |
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Definition
| Deferred tax assets are recognized to reflect future tax payment reductions related to the amount previously recognized in pre-tax income. |
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Term
| DLT Balance Sheet approach |
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Definition
| Accelerated depreciation - "front loading" of depreciation expense relative to financial statements, the depreciable asset's tax base is less than that of its book value --> Amount to be recovered for the use of the asset is therefore lower b/c the future tax deductions to be taken as the asset is consumed is less than its book value --> results in liability for future taxes and effectively reducing the recoverable amount of the asset |
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Term
| Cumulative temporary difference |
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Definition
| Cumulative excess of tax depreciation over book depreciation at year-end. |
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Term
| Journal Entries for DTL (when taxable income > book income) |
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Definition
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Temp differences that result in deferred tax liabilities are called future taxable amounts because future taxable income will be greater than future book income. |
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Term
| DTL Reversing Journal entries (when taxable < book) |
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Definition
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Term
| Flow chart for Income Tax Expense, Taxes Due and Changes in deferred tax liabilities |
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Definition
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Term
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Definition
| Temporary differences that result in deferred tax assets are called future deductible amounts because future taxable income—all other factors being equal—will be lower than future book income. |
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Term
| Temporary Difference that creates DTA |
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Definition
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Lease income - or deferred income is a taxable item because cash is received before income is recognized, in the following year company will recognize revenue but cash will have already been received. |
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Term
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Definition
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Income tax expense is lower than income tax payable b/c book income < tax income --> creates DTA to be used in future periods |
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Term
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Definition
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Income tax expense is higher b/c book income > tax income because revenue recognized but cash received in prior period. Company is able to credit DTA resulting in lower cash taxes paid |
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Term
| Total relationship: Income Tax expense, taxes due, and changes in DTA & DTL |
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Definition
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Term
| Net Operating Losses: Carrybacks and Carryforwards |
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Definition
1. Carry back the incurred loss and carry forward any remaining unused loss
2. Forgo carryback and carry forward the incurred loss
**Best option is to carryback as this maximizes the discounted present value of the benefit |
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Term
| Net Operating Loss Illustration |
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Definition
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Term
| Journal entry to reverse out income tax expense from NOL |
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Definition
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-->Asset created of income tax receivable
Credit expense (e.g. back out expense)
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Any amount not carried-back is carried forward as a DTA. |
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Term
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Definition
If probability of future taxable income is sufficient to realize fully DTA is greater than 50%, then DTA can be recognized in entirety.
If it is more likely than not that some portion will not be realized, then a DTA valuation allowance is required. |
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Term
| DTA Valuation Allowance Journal Entries |
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Definition
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Allowance is a contra account that reduces that net carrying amount of the DTA |
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Term
| Income Tax Accounting when Tax Rates Change |
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Definition
In any year that current or future tax rates change, the income tax expense number absorbs the full effect of the change and the usual relationship between that year's income tax expense and book income is destroyed...
the full change in the amount of future liability for income taxes is recognized as an increase or decrease in income tax expense in the year the tax rate change is enacted. |
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Term
| Tax Change: Tax expense 12/31/18 when new law in effect 1/1/19 |
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Definition
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FY18 Income is taxed at prior statutory rate, and DTL is adjusted based off temporary differences to account for the coming increase in tax expense. |
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