1 c.

DEFERRED TAX LIABILITY - CHANGES IN RATES

ANSWER: $12,000 x 25% = 3,000 DTL

1. What is the JE to record income tax expense?

CY FY
Accounting income 20,000
Temp Diff (12,000) $12,000 x 25% = 3,000 DTL
Taxable Income 8,000
30%
IT Payable 2,400

Journal Entry:
Inc Tax Expense 5,400 Plug
DTL 3,000
Inc Tax Payable 2,400

BTI:
DTA's and DTL's represent differences between accounting and taxable
income that will catch up/reverse/be realized in the future.
DTA's and DTL's are calculated using the tax rates enacted in the future
period when the differences catch up/reverse/be realize.
2 b. DEFERRED TAX ASSET - CHANGES IN RATES

ANSWER: $18,000 x 40% = $7,200 DTA

Roger c. PERMANENT DIFFERENCES
193
$18,000 x 40% = $7,200 DTA

BTI:
Permanent differences are not included in taxable income nor create DTA's or DTL's, so they

1 •Interest received from investments in bonds issued by state and municipal government
1 •Investment expenses incurred to obtain tax-exempt income (not tax deductible)

2 •Premiums paid for life insurance policies when the payer is the beneficiary (not tax deduc
2 •Life insurance proceeds on the death of an insured executive (not taxable)

3 •Fines and penalties due to violations of the law (generally not tax deductible)

4 •Compensation expense pertaining to some employee stock option plans

not tested N/A •Difference in tax paid on foreign income permanently reinvested in the foreign country an
not tested N/A •Portion of dividends received from U.S. corporations that is not taxable due to the dividen
not tested N/A •Tax deduction for depletion of natural resources (percentage depletion) that is allowed in
ate DTA's or DTL's, so they are not included in income tax expense.

and municipal governments (generally not taxable)

(not tax deductible)

he beneficiary (not tax deductible)

(not taxable)

t tax deductible)

ption plans (not tax deductible)

sted in the foreign country and the amount that would have been paid if taxed at U.S. rates
ot taxable due to the dividends received deduction
depletion) that is allowed in excess of an already full-depleted asset’s cost
4 a. PERM DIFF - DTL - CHANGE TAX RATE

ANSWER: $25,000 x 35% = $8,750

1. What is the JE to record income tax expense?

CY FY
Accounting Income 225,000
Perm Diff: Life ins premiums 10,000 **
235,000
Depreciation (25,000) $25,000 x 35% = $8,750
Taxable Income 210,000
Tax Rate 40%
IT Payable 84,000

Journal Entry:
Inc Tax Expense 92,750 Plug
DTL 8,750
Inc Tax Payable 84,000

2. What is the effective tax rate for the current year?

Income tax expense 92,750 41%

Accounting income 225,000

** Why add back?

Accounting income 235,000
Add back: Insurance expense (10,000) An expense that will never be deductible
Accounting income (net) 225,000
Have to add back to neutralize non-deductible expense
5 d. DEFERRED TAX ASSET - CHANGES IN RATES

ANSWER:
2017 100,000
2018 50,000
2019 50,000 200,000 x 30% = 60,000
2020 100,000 100,000 x 35% = 35,000
300,000 95,000 DTA

Hypothetical: $50,000 paid in 2016. Is temporary difference higher or lower?

2016 50,000 *
2017 50,000 *
2018 50,000
2019 50,000 150,000 x 30% = 45,000
2020 100,000 100,000 x 35% = 35,000
300,000 80,000 DTA

BTI:
If an item of revenue/expense is recorded in the same period as the
cash collection/payment, it does not represent a difference.
3 c. INCOME TAX EXPENSE - VALUATION ALLOWANCE - SUBSEQUENT YEAR

Income Tax Expense 8,000 Plug DTA

DTA 5,000 15,000
Income Tax Payable 13,000 5,000
20,000

Income Tax Expense 2,000 (20,000 x 10%)

Valuation Allowance DTA 2,000

Total IT Exp $ 10,000

BTI:
The DTA and DTL in the year subsequent to origination is adjusted to
the ending balance as part of calculating income tax expense.
Any amount of DTA that is deemed to be un-realizable will result in a
valuation allowance (contra-asset) and increase income tax expense.
DTA
7 a.

b. Permanent difference
c. Estimated expenses (e.g. warranty) resulting in DTA
d. Unearned revenue resulting in DTA
IMA DEFERRED TAX ASSET - CONCEPTUAL

1 c.

a, b, d DTL's
IMA

2 d. MACRS SL
100,000 100,000
33.33% 20%
33,330 20,000

Temp Diff 13,330

35%
DTL 4,666
6 b. NOL CARRYFORWARD

2012 2013
PY CY FY
Accting/Taxable Income 400
DTA Temp Diff: NOL Carryforward 200 -200 - 0 x 40% = 0 DTA
Taxable Income 200
40%
IT Tax Payable 80

1. Additional Question: What is the journal entry to record tax expense for 2013?

HINT: What journal entry did Dix record in 2012 when it experienced the NOL?

Deferred tax asset 80

Income tax benefit 80

DTA
2013 Journal Entry: 80
80
Income tax expense 160 Plug ** 0
DTA 80
Income tax payable 80

2. Example of limit (change taxable income to $240)

2012 2013
PY CY FY
Accting/Taxable Income 240 x 40% = 96
Temp Diff: NOL Carryforward 200 -192 8 x 40% = 3.2 DTA
Taxable Income 48
40%
IT Tax Payable 19.2

At the end of 2012, the $200 NOL carryforward resulted in a DTA of $80 ($200 x 40%)

At the end of 2013, the reamining unused NOL carryforward of $8 resulted in a DTA of $3.2

What is the JE to record income tax expense in 2016? DTA

Inc Tax Expense 96 Plug ** 80

DTA 76.8 76.8
Inc Tax Payable 19.2 3.2

** How can we confirm this is correct?

There are four exceptions to the rule that income tax expense can be calculated
by multiplying accounting income times the current year tax rate:
- Permanent difference
- Changes in future year tax rates
- Valuation allowance
- Uncertain tax positions
Use CARRYFORWARD