ACCT 485 Lecture Notes - Lecture 3: Cadency, Matching Principle, Financial Statement

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chocolatereindeer623

20 Sep 2016

School

Iowa State University

Department

Accounting

Course

ACCT 485

Professor

Murphy John

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Document Summary

Acct 485 lecture 3: taxes on the financial statements. A corporation"s financial accounting ( book ) income usually differs from its taxable income. This difference is generally caused by one or more of the following types of items: differences in reporting entities (e. g. , use of equity vs. cost methods of accounting for subsidiary earnings, different taxes, differences in accounting methods. Temporary differences: income and/or expenses appearing in both the financial statements and the tax return, but in different periods (also known as timing differences) Permanent differences: income and/or expenses appearing on the financial statements or the tax return, but not both, examples: meals and entertainment (50% not on tax return, income on your return but not your books: imputed interest. Schedule m-1 of form 1120: purpose, schedule m-3. M-1 (4 quadrants) relationship diagonal: keep track of the changes you make when filling out m-1. Never make any adjustments to the book, just the tax return.

Related Questions

Information for Entity A for the year ended December 31, 2018 ($ in millions):

Income from continuing operations before tax	$160
Temporary differences (all related to operating income):
Accrued warranty expense in excess of expense included in operating income	12
Depreciation deducted on tax return in excess of depreciation expense	32
Permanent differences (all related to operating income):
Nondeductible portion of entertainment expense	8
Interest received on municipal bonds	3
Balance in deferred tax asset account, January 1, 2018	1
Balance in deferred tax liability account, January 1, 2018	2
The applicable enacted tax rate for all periods is 40%.

Show work.

A. Prepare the appropriate journal entry to record income taxes.

B. What is Entity A's net income?

C. Sometimes a temporary difference will produce future deductible amounts. Explain what is meant by future deductible amounts. Describe at least one situation that has this effect, for example, one example is when rent revenue is collected in advance from tenants (deferred rent revenue for financial accounting purposes) but will be recognized as the tenants occupy the property. You can think of others. How are future deductible amounts recognized in the financial statements? As between deferred tax assets and deferred tax liabilities, which would management prefer and why?

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n certain countries, the tax rate applied to a companyâs tax return reporting income depends upon whether the profits for the period are distributed or undistributed. Amounts are initially taxed at the higher rate, but a tax credit is received when the profits are distributed. Therefore, companies need to determine the rate (distributed vs. the undistributed tax rate). Global Multinational Corporation (Global) is a U.S. company that owns and operates 100% of a consolidated subsidiary in a foreign jurisdiction where income taxes are payable at a higher rate on undistributed profits than on distributed earnings. For the year ending December 31, Year 1, Globalâs foreign subsidiaries taxable income is $150,000. Globalâs foreign subsidiary also has net taxable temporary differences amounting to $50,000 for the year, thus creating the need for a deferred tax liability on the balance sheet. The tax rate on distributed profits is 40%, and the tax rate on undistributed profits is 50%; the difference results in a credit if profits are distributed in the future. At the date of the balance sheet, no distributions have been proposed or declared. On March 31, Year 2, Globalâs foreign consolidated subsidiary distributes dividends of $75,000. Instructions: Obtain and review the accounting and related measurement guidance related to anticipated tax credits in IAS12, Income Taxes, and in Sections 25 and 30 of ASC740-10, Income Taxes-Overall. Document the relevant portions of the IFRS and US GAAP related to the accounting that Global must follow for the above series of transactions. Provide the required journal entries for both Year 1 and Year 2 under both the US GAAP and IFRS for each respective date where you are provided information in the above scenario. In your explanation for each journal entry, make sure you document the basis for each journal entry amount. In other words, how did you obtain the figures? In addition, provide a detailed explanation for each respective journal entry with the appropriate Reference(s) to IAS12 and ASC 740-10, respectively.

1.Southlawn Inc.'s taxable income is computed asfollows:


Book income before tax	$	2,405,600
Net permanent differences		(512,000	)
Net temporary differences		(189,000	)
Taxable income	$	1,704,600

Using a 34% rate, compute Southlawn's tax expense per books and taxpayable.

a.Tax expense per books $643,824;tax payable $579,564.

b.Tax expense per books $579,564;tax payable $643,824.

c.Tax expense per books $817,904;tax payable $579,564.

d.None of the choices arecorrect.

2.Monro Inc. uses the accrual method of accounting. Here is areconciliation of Monro's allowance for bad debts for the currentyear.


Beginning allowance for bad debts	$	61,150
Actual write-offs of accounts receivable during the year		(80,000	)
Addition to allowance		88,500
Ending allowance for bad debts	$	69,650

Which of the following statements is true?

a.Bad debt expense per books and the deduction for bad debts is$69,650.

b.Bad debt expense per books and the deduction for bad debts is$88,500.

c.Bad debt expense per books is $80,000, and the deduction forbad debts is $88,500.

d.Bad debt expense per books is $88,500, and the deduction forbad debts is $80,000.

3.On December 12, 2016, Hook Company, a calendar year, cashbasis business, mailed a $5,600 bill to Mrs. Gilder forprofessional services rendered during the month of November. Mrs.Gilder dropped off her $5,600 check at Hook's office on December28, but the company secretary did not deposit the check in Hook'sbank account until January 3. Which of the following statements istrue?

a.According to the constructive receipt doctrine, Hook mustrecognize $5,600 income in 2016.

b.According to the substance over form doctrine, Hook does notrecognize $5,600 income until 2017.

c.As a cash basis taxpayer, Hook does not recognize $5,600income until 2017.

d.As a cash basis taxpayer, Hook can elect to recognize $5,600income in either 2016 or 2017

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ACCT 485 Lecture Notes - Lecture 3: Cadency, Matching Principle, Financial Statement

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