accountingfordeferredincometaxes-CengageLearning.docVIP

FURTHER ISSUES IN ACCOUNTING FOR INCOME TAXES LEARNING OBJECTIVE Extend your understanding of accounting for income taxes by incorporating the effects of changes in income tax rates and in the measurement of deferred tax assets. U.S. GAAP and IFRS require firms measuring their income tax expense to incorporate the effects of temporary differences between the book basis and tax basis of assets and liabilities. Income tax expense each period equals1. The income taxes payable for the current period based on taxable income, 2. Plus the income taxes that the firm expects to pay (as reflected in changes in deferred tax liabilities) and minus the income taxes the firm expects to save (as reflected in changes in deferred tax assets) in future periods when temporary differences reverse. Note on Terminology We find the correct term income before income taxes for financial reporting too cumbersome to use throughout this section. Instead, we use book income to refer to income before income taxes reported in the financial statements, and we use taxable income to refer to the amount reported in the income tax return. Similarly, the terms book purposes and tax purposes distinguish the financial statements from the tax return. We use the term pre-tax income to refer to an item on the financial statements and the term taxable income to refer to an item on the tax return. The illustration for Burns Corporation in the textbook showed that income tax expense each period equaled pre-tax book income for financial reporting times the income tax rate; in each year, income tax expense was $32,000 (= .40 × $80,000). Income tax expense also equaled income taxes currently payable plus the change in the Deferred Tax Liability account. For example, income tax expense for the first year equals income taxes currently payable of $30,400 plus the $1,600 increase in the Deferred Tax Liability account. Income tax expense for the fourth year equals income taxes currently payable of $34,240 minu