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BU397 (49)
Chapter 18

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Allan Foerster

Chapter 18 Fundamentals - Adjustments usually need to be made to the income reported on the FS when determining the income that is taxable under tax legislatiion - Accounting income per GAAP ≠ Taxable income per income tax act - Accounting income o Known as income before taxes or accounting profit o Creates income tax expense (current and deferred)  Referred to as the tax provision - Taxable income o Is a tax accounting term that indicates the amount on which income tax payable is calculated o Creates income tax payable and current income tax expense - Companies usually prepare a schedule that begins with accounting income and adjust this amount for each area of difference between GAAP income and taxable income o Accounting income +/- differences = Taxable income x current tax rate =  DR current income tax expense  CR current income tax payable - Major differences between accounting and taxable income o Revenues or gains are taxable after they are recognized in accounting income  Revenue isn’t recognized on taxable income until cash is received  Gains aren’t recognized on taxable income until they are realized o Expenses or losses are deductible for tax purposes after they are recognized in accounting income  Expenses aren’t recognized in taxable income until they are paid out o Revenues or gains are taxable before they are recognized in accounting income  If cash is received for services to be rendered in the future, it is recognized as revenue in taxable income when the cash is received  It is unearned revenue for accounting income o Expenses or losses are deductible before they are recognized in accounting income  Accounting income uses whichever GAAP depreciation method the company uses  Taxable income uses CCA method  Therefore, the assets cost may be deducted faster for tax purposes than is expensed for accounting purposes  This makes taxable income in the early years of the assets life lower than the accounting income  Vice versa for later years o Permanent differences  Caused by items that are included in accounting income but never in taxable income  OR included in taxable income but never in accounting income  Examples of accounting income but not taxable  Non-tax-deductible expenses  Income/loss from associate  Dividends from taxable Canadian corporations  Examples of tax purposes but never accounting  Taxable capital gains  Depletion allowance of natural resources that exceed the resources cost  Since these differences affect only the period in which they occur  There are no deferred or future tax consequences associated with the related balance sheet accounts Deferred Tax Rates - Should use the enacted rate at the balance sheet date o The rates that are expected to apply when the tax assets are realized or the tax liabilities are settled - The effect of deferred tax rate changes should be immediately recognized on all deferred tax accounts - Rate changes are treated as an adjustment to the deferred income tax expense/benefit with the offset going to the liability or asset Presentation - On the balance sheet, future tax assets and liabilities are shown net of the actual liability or asset causing the future tax benefit or other - On the income statement, the current income tax expense/benefit are shown separately from deferred tax benefits/expenses Tax loss carryback and carry for
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