Deferred Taxes Worksheet For Spreadsheet Variables

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Calculate the income tax expense, income tax payable, and deferred tax amounts based on the provided financial data. Prepare the journal entries to record income tax expense, income tax payable, and deferred taxes for the reporting period. Additionally, summarize the presentation in both the income statement and balance sheet, including adjustments for valuation allowances on deferred tax assets.

Paper For Above instruction

Deferred taxes are a critical aspect of financial accounting, reflecting temporary differences between the carrying amount of assets and liabilities in financial statements and their tax bases. Accurately calculating and reporting deferred taxes ensures compliance with accounting standards and provides a realistic view of an entity's tax position. This paper discusses the calculation of income tax expense, income tax payable, and deferred tax amounts, illustrates the journal entries to record these items, and explains their presentation in financial statements, including the impact of valuation allowances.

Firstly, understanding the components involved in deferred tax accounting is essential. Income tax expense reflects the total income tax attributable to the financial income reported in the period, incorporating current and deferred components. Income tax payable represents the amount of tax owed to the tax authorities based on taxable income. Deferred taxes arise from temporary differences, which are differences between the book value of assets and liabilities and their tax bases, expected to reverse in future periods.

Based on the provided data, the calculation of income tax expense entails adjusting pre-tax financial income for the effects of permanent and temporary differences. For example, in Year 1, pre-tax financial income is $200,000, with temporary differences totaling $100,000 (warranty expense recognition) and permanent differences of $5,000 (non-deductible life insurance premiums). Applying a 30% tax rate, the income tax expense is computed by considering both current and deferred tax effects. The current tax expense is based on taxable income, which includes temporary differences, while the deferred tax expense considers the future reversal of these differences.

To illustrate, in Year 1, the income before taxes is $200,000. Temporary differences of $100,000 generate deferred tax liabilities of $30,000 (30% of $100,000). Permanent differences of $5,000 increase taxable income but do not affect deferred taxes. The current tax expense is calculated as 30% of taxable income, when considering temporary differences, resulting in a current tax expense of approximately $60,000. Deferred taxes are recorded as a liability or asset depending on whether temporary differences are taxable or deductible in future periods.

Journal entries to record these tax components typically involve debiting income tax expense and crediting income tax payable for the current taxes. Deferred tax liabilities or assets are recognized with corresponding credits or debits to deferred tax accounts, which reflect the future tax effects of temporary differences. For example, a deferred tax liability of $30,000 is recorded for temporary differences arising from depreciation, while valuation allowances might reduce the deferred tax asset if realization is uncertain, as demonstrated in the case where a $2,000 valuation allowance is established.

When presenting these figures in financial statements, the income statement discloses total income tax expense, separating current and deferred components. The balance sheet reflects current tax assets and liabilities, alongside non-current deferred tax assets and liabilities, net of any valuation allowances. Proper presentation ensures clarity on the entity's tax position and future tax obligations or benefits.

Furthermore, recognition of valuation allowances is crucial where recoverability of deferred tax assets is uncertain. Prior to closing books for 2013, a valuation allowance of $2,000 was identified for depreciation-related deferred tax assets. The journal entry involves debiting income tax expense and crediting a valuation allowance account, thereby reducing the net deferred tax asset on the balance sheet. Accurate valuation ensures the financial statements do not overstate the realizable tax benefits.

In summary, the calculation of income tax expense, payable, and deferred taxes is an integral part of financial reporting that requires attention to temporary and permanent differences, applicable tax rates, and possible valuation allowances. Proper journal entries and presentation in the financial statements facilitate transparency and compliance with accounting standards such as ASC 740 (Accounting for Income Taxes). Mastery of these processes enhances the quality of financial reporting and aids stakeholders in understanding an entity's tax position and future liabilities.

References

• Arnold, S. T. (2020). Financial Accounting for Decision Makers. Pearson Education.
• FASB. (2022). Accounting Standards Codification (ASC) 740: Income Taxes. Financial Accounting Standards Board.
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• Shapiro, A. C. (2019). Cost Accounting. Pearson.
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• U.S. Department of the Treasury. (2021). Reporting Financial Information for Deferred Taxes. Internal Revenue Service Publications.
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