Question

Answer the following questions. Please type using a word processing program and bring a printed copy to class. Write as much or as little as you feel necessary to answer each question to the best of your ability. You may use all available resources to complete this case – e.g., lecture slides, notes, your book, and the Accounting Standards Codification. Collaboration with others in your group is allowed to the extent that it is helpful. How you work together is up to you – however, I encourage everyone in the group to take at least some part for every question. Please turn in only one finished assignment for each group. Use appropriate citations where relevant and according to your professional judgment. For questions requiring use of the codification, please use the following style:

1) Cite the ASC down to the Paragraph. For example, (ASC 330-10-05-01)

2) Copy-paste the paragraph you cite from the codification into the word document.

3) Interpret the codification paragraph into ‘plain English’ as best you can. In other words, how would you explain the appropriate accounting treatment to a colleague, boss, or business partner who has a basic understanding of accounting? You may (and are encouraged to) use debits and credits or t-accounts to illustrate the accounting if appropriate.

After a decade or so in mining, you decide to change jobs because you wanted to do nothing with anything related to tax or tax accounting ever again and in a regulated industry, there was too much of this. A few years later, however, the controller comes to you with a comment letter from the SEC which expresses concern about how your company reports its current and deferred income tax accounts in its financial reports. You look as white as a sheet because you hoped to never do tax accounting again. Find and interpret the appropriate ASC guidance for how to initially measure deferred taxes. (You may need to cite more than one ASC paragraph.)

Answer 1

ASC 740 - (Income Taxes) of the US GAAP needs income taxes to be accounted for by the asset/liability method. This method places importance on the valuation of current and deferred tax assets and liabilities. The amount of income tax expense recognized for a period is the amount of income taxes currently payable or refundable, +/- the change in total deferred tax assets and liabilities. Under this method, which focuses on the balance sheet, the amount of deferred income tax expense is determined by changes to deferred tax assets and liabilities.

As for deferred taxes, after the current tax payable is calculated we should determine whether any other income taxes have to be recognized for financial reporting purposes. This depends on whether there are any temporary differences between the amounts reported for tax purposes and those reported for book purposes.

Depending on wether deferred tax liability or deferred tax asset is created, the following entries need to be passed:

Profit & Loss A/c Dr

To Deferred Tax Liability A/c

OR

Deferred Tax Asset A/c

To Profit & Loss A/c

There are 2 types of differences - Temporary and Permanent.

A temporary difference is the difference between the asset or liability provided in the tax return and its carrying (book) value in the financial statements. This difference will result in a taxable or deductible amount in the future. For example, consider a product warranty liability. For book purposes, a company would record a liability related to a product warranty. However, that liability would not be recognized for tax purposes, because the expense related to the product warranty would not be deductible on the income tax return until it was paid. Therefore, the expense and associated liability are recognized for financial reporting purposes before they are recognized for tax purposes. Since GAAP is based on the accrual method of accounting, an asset or liability should be recognized for these differences that have future tax consequences.

Deferred tax expense or benefit generally represents the change in the sum of the deferred tax assets, net of any valuation allowance, and deferred tax liabilities during the year.