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Chapter 16

ACTG 3120 Chapter Notes - Chapter 16: Deferred Tax, Tax Basis, Deferred Income


Department
Accounting
Course Code
ACTG 3120
Professor
Elizabeth Farrell
Chapter
16

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Chapter 16: Corporate Income Tax
INCOME TAX PROVISION VERSUS EXPENSE
Provision for income tax: refers to either income tax expense or recovery. Recovery is
generated when a company has a loss for tax purposes; the income statement entry for income
tax may be a credit rather than a debit.
Not an estimated liability.
May use the term provision for income tax expense and recovery
Short cut approach only works if the tax rate does not change from year to year.
INTERPERIOD TAX ALLOCATION METHOD
Interperiod tax allocation: allocating tax expense to an appropriate year regardless of when it
is actually paid.
things I do now will result in paying taxes later
Permanent Difference: arises when an I/S element enters the computation of either taxable
income or pre-tax accounting income, but will NEVER enter the computation of the other, and
therefore, is never reversible.
e.g. Golf Club Dues, Capital Gains, Penalties, Political Contribution
Dividends received Can corps from other Can corps
Equity in earnings significantly influenced associate companies
50% capital gains
Golf club dues
50% meal and entertainment expenses
Interest and penalties on taxes
Political contributions
Temporary Difference: arises when the tax basis of an asset or liability differs from its
accounting carrying value, due to timing of inclusion in accounting income or taxable income.
Used in both calculations but in different periods reversing.
e.g. CCA vs. Amortization, Warranty Expense vs. Actual work completed, Development
Costs
don’t get tax deduction for warranty until the work is done
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Accounting income: computed using accrual method under GAAP
Taxable income: computed using cash method of tax accounting; potentially lower than
accounting income
Intraperiod Tax Allocation: allocation between lines on F/S
Discontinued items shown net of tax
Income tax expense for continuing operations shown separately
Income tax expense (in relation to things to occur in the future)
+ Income from continued operations
+/- Gain/loss from discontinued operations (net of tax)
= Net Income
Carrying value vs. tax basis
Carrying amount - on b/s GAAP rules
Tax basis - amount would be on b/s if prepared using tax rules
Temporary difference is difference between carrying amount and tax basis
CONCEPTUAL ISSUES IN INTERPERIOD TAX ALLOCATION
Issues:
The extent of allocation
o No allocation with the Taxes Payable Method (a choice in ASPE)
Income tax expense = current income tax
Corresponds with actual CF for income tax
ASPE allows companies to NOT record deferred tax for ANY temporary
differences under this method (tax expense is based only on tax payable)
o Full allocation with the Comprehensive Tax Allocation Method
Income tax expense = current income tax payable + the change in
deferred tax balances
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