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Questions and Answers
What occurs when deferred tax liabilities arise?
What occurs when deferred tax liabilities arise?
- Income tax expense is higher than taxes payable. (correct)
- Current tax paid is higher than the tax accrued.
- Taxes payable is reported higher than income tax expense.
- Income tax accounting rules defer recognition of expenses.
Which of the following describes a deferred tax asset?
Which of the following describes a deferred tax asset?
- It indicates advance tax payments or overpayment of taxes. (correct)
- It typically arises from underpayment of taxes.
- It becomes a liability if taxes are overpaid.
- It represents taxes payable in future periods.
What is the main reason for the timing difference that leads to deferred tax liabilities?
What is the main reason for the timing difference that leads to deferred tax liabilities?
- Advance recognition of income for tax purposes.
- Overstated expenses in financial reporting.
- Differing income tax regulations between jurisdictions.
- Differences in reporting standards under IFRS and tax filings. (correct)
How are deferred tax liabilities represented on financial statements?
How are deferred tax liabilities represented on financial statements?
Under what circumstance would a company record a deferred tax asset?
Under what circumstance would a company record a deferred tax asset?
What distinguishes deferred tax liabilities from deferred tax assets?
What distinguishes deferred tax liabilities from deferred tax assets?
What can lead to a difference between income tax expense and income taxes payable?
What can lead to a difference between income tax expense and income taxes payable?
What characterizes a deferred tax liability in terms of its creation?
What characterizes a deferred tax liability in terms of its creation?
When is a provision recognized for tax purposes according to IAS 37?
When is a provision recognized for tax purposes according to IAS 37?
Why might research and development costs create deferred tax assets?
Why might research and development costs create deferred tax assets?
What happens when identifiable liabilities are recognized at fair value in a business combination under IFRS 3?
What happens when identifiable liabilities are recognized at fair value in a business combination under IFRS 3?
In the Hunt Company illustration, what causes taxable income to be lower than pretax financial information?
In the Hunt Company illustration, what causes taxable income to be lower than pretax financial information?
What does it imply when assets are revalued downwards without affecting taxable profit?
What does it imply when assets are revalued downwards without affecting taxable profit?
What is the total income tax expense reported for ABC Company at the end of 2015?
What is the total income tax expense reported for ABC Company at the end of 2015?
What was the deferred tax liability reported by ABC Company at the end of 2015?
What was the deferred tax liability reported by ABC Company at the end of 2015?
What is the deferred tax liability at the end of 2014?
What is the deferred tax liability at the end of 2014?
How much did ABC Company reduce its deferred tax liability by at the end of 2016?
How much did ABC Company reduce its deferred tax liability by at the end of 2016?
What is the tax rate used in computing the deferred tax liability?
What is the tax rate used in computing the deferred tax liability?
What is the current tax expense for ABC Company for 2015?
What is the current tax expense for ABC Company for 2015?
What were the taxable amounts for Starfleet Corporation in 2019 from the temporary difference?
What were the taxable amounts for Starfleet Corporation in 2019 from the temporary difference?
For ABC Company, what was the current tax expense for 2014?
For ABC Company, what was the current tax expense for 2014?
What was the deferred tax liability at the beginning of 2018 for Starfleet Corporation?
What was the deferred tax liability at the beginning of 2018 for Starfleet Corporation?
How is the deferred tax expense for 2014 calculated?
How is the deferred tax expense for 2014 calculated?
What is the total amount of future taxable amounts due to existing temporary differences?
What is the total amount of future taxable amounts due to existing temporary differences?
How much was the deferred tax liability at the end of 2016 for ABC Company?
How much was the deferred tax liability at the end of 2016 for ABC Company?
What two components make up the income tax expense for 2014 according to the computation here?
What two components make up the income tax expense for 2014 according to the computation here?
What tax rate does Starfleet Corporation apply for all years?
What tax rate does Starfleet Corporation apply for all years?
What was the deferred tax liability at the beginning of 2014 for ABC Company?
What was the deferred tax liability at the beginning of 2014 for ABC Company?
Which computation shows the increase in the deferred tax liability balance during the accounting period?
Which computation shows the increase in the deferred tax liability balance during the accounting period?
What happens when there are taxable temporary differences?
What happens when there are taxable temporary differences?
How is a net operating loss (NOL) defined?
How is a net operating loss (NOL) defined?
What is the tax effect of deductible temporary differences?
What is the tax effect of deductible temporary differences?
Which of the following is true regarding current tax expense calculated from taxable income?
Which of the following is true regarding current tax expense calculated from taxable income?
What do temporary differences indicate in financial reporting?
What do temporary differences indicate in financial reporting?
In which scenario would a company benefit from a net operating loss?
In which scenario would a company benefit from a net operating loss?
What is the accounting entry for a deferred tax asset?
What is the accounting entry for a deferred tax asset?
What results from a company's expenses exceeding its revenues?
What results from a company's expenses exceeding its revenues?
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Study Notes
Deferred Taxes Overview
- Deferred taxes represent the difference between income tax paid and income tax accrued, leading to a surplus or deficit.
- Two primary types: Deferred Tax Liabilities (DTL) and Deferred Tax Assets (DTA).
Deferred Tax Liabilities (DTL)
- Recognized when taxes paid in the current period are lower than taxes under the accrual basis.
- Arises due to timing differences between earnings recognition for accounting versus tax purposes.
- Reflects future tax payments due for temporary taxable differences.
- Temporary differences result from differences in financial reporting standards (e.g., IFRS) and tax rules.
- Deferred tax liabilities are recorded when income tax expense exceeds taxes payable, indicating future payments are owed.
Deferred Tax Assets (DTA)
- An asset that arises when the company has overpaid taxes or paid advance taxes.
- Examples include provisions recognized under specific accounting standards that are deductible in future periods.
- Can also result from long-term employee benefits or losses recognized in one period but deductible in another.
Tax Computation Examples
- For 2014:
- Book basis accounts receivable: Br 30,000, Tax basis: 0, leading to cumulative temporary difference: Br 30,000.
- Calculated DTL: Br 12,000 using a tax rate of 40%.
- Income tax expense entails the sum of current tax expenses and deferred tax expenses.
Income Tax Expense Calculation
- 2014 Income Tax Expense:
- DTL at end of 2014: Br 12,000, DTL at beginning: 0.
- Total expense: Br 28,000 (Br 12,000 deferred and Br 16,000 current).
Journal Entries for Income Tax
- 2014:
- Debit: Income Tax Expense Br 28,000
- Credit: Income Taxes Payable Br 16,000
- Credit: Deferred Tax Liability Br 12,000
- 2015:
- DTL end: Br 4,000, Current tax expense: Br 36,000, Total: Br 28,000.
Future Taxable Temporary Differences
- Temporary differences affect carrying amounts of assets and liabilities, impacting future taxable profits.
- Taxable temporary differences lead to deferred tax liabilities, while deductible temporary differences create deferred tax assets.
Net Operating Loss (NOL)
- Occurs when a company’s expenses exceed revenues, leading to negative taxable income for the period.
- NOL can offset future taxable income, reducing cash taxes payable.
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