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F6 - M5 - Income Taxes: Part 1
Terms in this set (5)
define permanent differences and list examples
Permanent differences are transactions that affect either taxable income or financial income, but not both, and only in the period in which they occur. They do not affect future financial or taxable income
-Premium on key-officer life insurance policy when entity is owner and beneficiary
-Proceeds from key-officer life insurance
-Tax-exempt interest on state and municipal bonds
-Nondeductible portion of meals and entertainment
-Fines and expenses in violation of law
-Dividends received deduction
define temporary differences and list examples
Temporary differences are differences between taxable income and financial income that result in taxable or deductible amounts in future years and necessitate the recognition of deferred tax assets or liabilities
*Depreciation (financial vs MACRS)
*Gross profit on long-term construction contracts (percentage completion vs completed contract)
*Estimated warranty costs
*Gross profit on installment sales (accrual vs. cash)
*Bad debt expense using the allowance method vs. actual bad debt expense
define deferred tax liability
Anticipated future tax liabilities derived from situations in which future taxable income will be GREATER than future financial income due to temporary differences.
A deferred tax liability is measured by applying the applicable enacted tax rate and provisions of the enacted tax law to temporary differences in the period in which they are expected to reverse.
define deferred tax asset
Anticipated future taxable income will be LESS than future financial income due to temporary differences.
A DTA is recognized for all deductible temporary differences, operating losses, and tax credit carry-forwards by applying the applicable enacted tax rate and provisions of the enacted tax law to temporary differences in the period in which they are expected to reverse. DTAs are also subject to recording a valuation allowance to reduce the asset to its net realizable value if it is more likely than not that its full value will not be recognized.
what is the valuation allowance
If it is more likely than not (>50%) that some portion or all of the DTA will not be realized, a valuation allowance needs to be created to recognize the reduction in the carrying amount of the DTA.
Note: IFRS prohibits the use of a valuation allowance. Under IFRS, a DTA is recognized only when it is probable (more likely than not) that sufficient taxable profit will be available against which the temporary difference can be utilized.
Sets found in the same folder
F6 - M1 - Leases: Part 1
F6 - M2 - Leases: Part 2
F6 - M3 - Derivatives and Hedge Accounting
F6 - M4 - Foreign Currency Accounting
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