Accounting for Income Tax

Big Picture Topics + scribbles to jog your brain

by gaap toothed on March 10, 2010 · 1 comment

in FAR

The journal entries and background information come from 2 of the most difficult MPCs that I have come across so far (and actually bothered to take note of)… At the time of answering the MPCs, I thought I had mastered the material, but these 2 very obscure/difficult to concepts stumped me during my review.

DTA – Accounting for Income Taxes NOL

Taxable Income
2010 : $300,000
2011 : ($700,000)
2012 : $1,200,000
Tax rate = 30% 


2011:
Dr. Tax Refund Receivable         90,000
Dr. DTA                                  120,000
     Cr. Tax loss benefit/Income tax expense    210,000
Dr. Tax loss benefit/income tax expense    120,000
     Cr.Allowance to reduce DTA to realizable value     120,000

2012:
Dr. Income Tax Expense     $360,000
          Cr. Income Tax Payable        $240, 000
          Cr. Deferred Tax Asset       $120,000
Dr. Allowance to reduce DTA    120,000
     Cr. Tax Benefit due to loss carryfoward    120,000

Income before taxes                                   1,200,000
Income tax:
Current                                                240,000
Deferred                                              120,000
Benefit Due to Loss Carryforward     (120,000)  
Total Income Tax Expense          ;           ;         240,000
Net Income                                                   960,000

DTL/Investments – Equity Method + Dividends Received

Investee Dividend Paid to Investor Company = 30,000
Investee Income portion of Investor Company = 180,000
Tax rate = 30%

Investor Pre-Tax Income                           180,000
Permanent Difference:
Dividend Received (30,000 x .8)              -24,000
Temporary Difference:
Undistributed Equity (180,000 – 30,000) -150,000
Taxable Income                                       6,000

Income Tax Expense      10,800
        Income Tax – Current          1,800
        DTL                                     9,000

Tagged as: 2008 FAR, Accounting for Income Tax, Big Picture Topic, FAR

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DTAs + NOL carryforwards nerdGASM, Part 3 – Introduction

by gaap toothed on March 3, 2010 · 1 comment

in FAR,Featured,tips for success

I answered these questions originally in a CPAnet forum post. I decided to re-write and post them here because my posts were so long and its difficult to actually see what question I’m trying to answer. So far this has been my favorite question because I learned so much from it and it really solidified my knowledge of SFAS 109. If you can answer these questions, then I think its safe to say you’ve got Accounting for Income Taxes down solid.

In conclusion, these 2 questions are really freaking hard because they require several journal entries and proper income statement presentation. They are scary freaking hard because I assume this is an AICPA retired exam question that are sold to CPA review programs (which is why Becker and Wiley each have this similar question).


I was able to answer this question through the help of my college accounting textbook. I went through about 5 different CPA programs and none of them adequately explained the presentation in the Income Statement or the DTA allowance account with carryforwards. They all at the very least provided a paragraph about DTA allowance account, but not much else. Maybe that means its not a heavily tested topic and isn’t much to worry about? I doubt it, because this question requires 2-4 journal entries and an understanding of the presentation in the Income Statement. Also, Phil Yaeger even goes over this question in his module 12 lecture (although he keeps it short and kinda just gives you an answer with not real explanation).

This questions is VERY interesting conceptually because of its effects to net income for 1993 and 1994. If you setup an allowance account for the DTA from the carryfoward, then you are pretty much saying you don’t think you will have Taxable income to be able to use the tax benefit from the DTA. If you don’t set up the allowance account, then you recognize the benefit from the carryfoward in the year of the NOL because of positive evidence that assumes you will have taxable income in the next year. The “more likely than not” provision is very subjective and open to interpretation so that this stuff all comes into play with TAX PLANNING and also earnings manipulation.

If you carryforward because of a higher tax rate, you pay less taxes in the future. You could also use the carryforward if you are expecting a bad year and can manipulate your bottom line to look better than it really is by recognizing a tax benefit from your valuation account.

Now that I think about it, I really like this question because it forced me to understand the purpose of NOLs, carryfowards, and the DTA valuation account. Also, I had a mini accounting “nerdgasm” while reading, which got my blood pumping and made me feel really cool. LOL =( my life sucks…..

Please feel free to ask me any questions!

I will post the 1993 Income Statement presentation by request! No point in writing it out if no one is there to read it, except for me of course….

Tagged as: Accounting for Income Tax, Becker, CPAnet, difficult concept, DTA, DTA/NOL EPIPHANY, FAR, interesting accounting concept, NOL, SFAS 109, Wiley, Wiley Module 12

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DTAs + NOL carryforwards nerdGASM, Part 1 – Importance of recognizing DTA Loss Carryback in year of the NOL

by gaap toothed on March 3, 2010 · 0 comments

in FAR,Featured,tips for success

FAR Question from Becker:
Mobe Company reported the following operating income (loss) for it’s first three years :

  • 1992 : $300,000
  • 1993 : ($700,000)
  • 1994 : $1,200,000

For each year, there were no deferred income taxes (before 1992), and Mobe’s effective income tax rate was 30%. In it’s 1993 income tax return, Mobe elected the two year carry back of the loss. In its 1994 income statement, what amount  should Mobe report as total income tax expense?


a. $120,000
b. $150,000
c. $240,000
d. $360,000

Answer Explanation:



It is necessary to prepare to the journal entries for 1993 and 1994. The key to answering this question is the proper presentation of the 1994 Income Statement. To answer this question we must also assume that no Valuation account of DTA is made.

Journal entries to record the 1993 NOL: Mobe pays no taxes in 1993 and records a Tax Refund Receivable of 90,000 and records a Deferred Tax Asset (future deductible amount) of 120,000.

1993 Journal Entries:

Dr. Tax Refund Receivable                90,000
Dr. DTA                                            120,000
Cr. Income Tax Expense (Benefit)             210,000

Journal entries to record the 1994 NOL: Mobe owes 240,000 in taxes payable.  The credit to the DTA account of 120,000 serves to reduce his DTA account to zero and increase his Income Tax Expense to 360,000.

1994 Journal Entries:

Dr. Income Tax Expense*           360,000
Cr. Income Tax Payable                 240,000
Cr. Deferred Tax Asset**               120,000

* As always, the income tax expense amount is a derived amount.
** Since the DTA is recognized (matching principle) in the year of the NOL and there is no remaining NOL to carryforward; the DTA balance is closed after the reversing entry.

Assuming that no valuation account for DTA is necessary, the answer would be 360,000 because according to SFAS 109 we must recognize the benefit from the loss carryforward in the year of the loss. Since Mobe elected the 2 year carryback of the loss, the tax benefit and the debit to DTA has already been recognized in 1993. We are adding “DTA” with current tax expense in 1994 because we need to reduce the DTA account to 0.

In order to reduce the DTA account, we have to make a credit entry to the DTA account since there are no other temporary differences. As johnnyutah said, “… your book income tax expense is $360,000 but you actually only book a payable for $240,000 because the other $120,000 is a reversal of the DTA.”
So Income Tax Expense is 360,000 minus the 120,000 DTA.

On the 1994 Income Statement, the Income Tax Expense would be $360,000:
Income before taxes             1,200,000

Income tax:
Current                240,000
Deferred              120,000
Total Income Tax Expense*         360,000
Net Income                             840,000


* Another way to present the income statement is to simply put a line for “Total Income Tax Expense” and provide a breakout for the Current, Deferred, and Benefit amounts in the notes to the financial statement.

The 1994 income statement does not report the tax effects of either the loss carryforward, because Mobe had reported both previously in 1993.

Correct Answer: D –  $360,000

Tagged as: Accounting for Income Tax, Becker, CPAnet, DTA, DTA/NOL EPIPHANY, FAR, interesting accounting concept, NOL, SFAS 109, Wiley, Wiley Module 12

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Module 12 – Deferred Taxes

by gaap toothed March 1, 2010 FAR

SFAS 109 – Accounting for Income Taxes This module/lesson took me a while because I always mix up DTA’s and DTLs, but I spent quality time learning it all over again to full understand the concepts.  I had to refer to my old Intermediate Accounting 12th edition for help, but I think I finally got [...]

Tagged as: Accounting for Income Tax, deferred tax, DTA, FAR, SFAS 109

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