Accounting 322 Exam 2
Essays 16
Pre-Tax Accounting Income:
Taxable Income:
Deferred Tax Liability: This occurs when the pretax accounting income is more than taxable income. This comes from revenues being reported on the income statement before the tax return or an expense that is recognized on the tax return before the income statement. This creates a liability for the income tax deferred that will be paid in the future when the related assets are recovered or liabilities settled. The temporary difference reverses, pretax accounting income will be less than taxable income to compensate for the liability. Can also be better economically than a DTA because of the time value of money, it acts as an interest free loan. (Depreciation)
Deferred Tax Asset: This occurs when taxable income is more than pretax accounting income. This comes from revenues being recognized on the tax return before the income statement or expenses being recognized on the income statement before the tax return. This a tax benefit in the form of a future deductible amount. All deductible amounts, such as loss carryfoward create deferred tax assets. If the DTA is more like than not that some portion or all of the amount will be realized, it is lowered by a Valuation Allowance account.
Temporary Differences: This is from the differences in financial account and taxes, and the reported amount of and asset/liability and its tax basis. For example, pretax account income may be greater than taxable income in one year, but lower than taxable income in later years when to asset is collected or liability is settled. Temporary differences eventually reverse after the originating difference, and taxable income and pretax accounting income will equal of a period of time.
Permanent Differences: These differences arise from transactions that under tax law will never affect taxable income. For