Income Taxes and Financial Accounting * © Learning Objectives | ‘After reading this chapter, you should be able to: raat ‘Understand the many possible interpretations of income tax allocation. bos ‘Comprehend why discounting of defered tax assets and Iabilities ls warranted. i poe Interpret the shift from SFAS. Na. %6 to SFAS No. 109. i | 4 Understand the booking of tax lors exrryforwatds, ' j » Understand FASB and IASB’s new efforts to address tax accounting. \ er counting has become considerably more complex as a result of te federal government's attempt to Influence such macrocconomle factors 35 cosporate investment by means of the income taxation process. In this chapter, we exam: income tax allocation, a topic that has been extremely controversial for many years even after SPAS No. 109 was introduced! The income tax law of 1913 established business Income as a basls for taxation, income for tax purposes was defined differently than. Income for accounting ? es, the law resulted in many items being recognized in diferent time petiods for tax and book purpases. The efferts to “synchronize” tax and book accounting 6° back > the 1930s, but it was ARBS 43 and 44 (revised) (1953 and 1958, respectively) that ‘established income tax allocation as a canon of financial accounting. After he basc elements of tax alloctton, we avalyze extensively the princpalng TY neem taxes is one of the most controveria) aan ry. ARE et int pote 8 wor that ade a mating Lavoe when viewed withthe iodght af yen heated debate: expenst that should be allocated, when necessary and pn. seer fo tnoame and other accounl, as other experi ar allocated tg irtetoce aatement should sflect under ths hea... 1s the expense allocable to the iicome included In the incorme statement for the year? ‘Tx allocation silts om the timing differences between when a aime g ‘expense item reaches the pubilshed financial statements as opposed to when apis ‘on the tax tetum. ta these situations, tax expense is bascd on the published ble ‘x Income figure. The problem can alsey be viewed from the perspective ofthe ‘ance sheet, where the tax basls and book busls of assets and abilities eifer. Henc, income tax allocation process acts like a balance wheel between income tax expt! ‘come tax lability mumbers with the difference appearing on the balance she. He -chselysentinize the meaning ofthe income tax expense mumnber and the balan ht ne Cees ett nce lax llocation AE Opinlon No. 11 coated the thaast of ARs 43 and 44 (reve). As bet vari lence a tex allocation mat take place, despite the poly 7 ree msn dilerenoe. This requcerent Is known es comprehen ale compechenahee 10 Bbc, SEAS No, 96 appeared in 1987. I contin’ servatve i. temas of ec PE2C Of APB Opinion No, 11, but it was unde STAS Na. 109 Oe AS ee ax aes oa the lace be BS ‘evenhanded and restored consistency in terms oa 1 Wabies elstve tothe balance sheet recognition of defeced &Chay HST 16 © ncn Tes ec Fania Acon ting —_cerown net ofthe tax effect The balance ofthe tot ons #7057" pet income before income taxes and tax expense figure: pens elativey easy 10 employ and esata tes sates steal co outweigh te css. Noting ese of thawed meee nell ment tax allocation. coretical natures involved rege ter eos Ons OF Aung dlrences (now called ity is greater than tax expense where elther revenues ae roe toninta lloring= __ cei of cash for ret Or subscriptions prior to the prod in which a erat ox rac = » Warranties accounting purposes when sn for tax purposes when work is performed anes _, postretirement benefits other than pensions recognized prior to cash payment + pad debt expense recognized in the period of sale for financial reporting pur poses and in the period when the actual write-off occurs fr tax purposes Conversely, tax expense is greater than tax liability when either revenuesares ‘pied more slowly Or expenses more rapkdly for tax purposes than for book: “These situations include the following: + Income from long-term construction contracts using the ge completion approach for financial accounting and the completed-contzacl approach for income taxes % Installment sale income recogn ed for financial purposes atthe tm of sale an whien cash is collected for taxes " Accelerated depreciation for taxes and straight-line ‘depreciation for ficanctal . f Intangible drilling and development costs deducted when Incurred for taxes and capitalized for financial accounting, The Rationale of Income Tax Allocation ds the name explicitly states, income tax allocation ee Thamss, infact, has characterized it in very pithy tems: allocation. Taxallocation embodies the allocation problem 1h OF of ee ie + Taxcallocation may be perceived as 2. attempt! een sistent, and its allocation problems are the ‘consequences 0 ‘that income tx Although the language of ARB No. 4315 n°! oe eee stisemplon? E {s grounded in the matching coneeP- -ae ‘ecounting THEY lications of matching. In the et a “Ust tion, differs from all oth Pe Ae caisepes Hla, tax allocation, ecevenie e eh, don expenses a mat hed 2 accomplishments Gevenues) Home’ eon ge that hae location attempts to normalize, efforts (expen wet income tax alloc ie matching that occurs und income, Hence, after-tax income is ay et ith pre-tax sete Trough about by tx locaton income, The matching a hot ith pre-tax i i atement than that of any other expense Ne ton the income st mf at a lower Poin og the 1990s, matching provides a weak rationale for, fromthe penned Onin the famevork ofthe historical cost apposeh a sate ae of the allocation process was not questioned, a sting aN income tax allocation. ok may smooth income, but Because Use mandion ie ees exit itcannot be construed as asmoothing instmensing thas no choice but touse itunder both APB Opinion No. 11 and sis, Gmpichensive allocation i thus an example of rigid uniformity. ‘The FASB overhaul of income tax allocation in SFAS No. 96 and then aginiasgys No, 109 kept the comprehensive aspect of AP Opinion No. 11 butswitce fe revenue-expense (matching) orientation to the asset-tiability viewpoin- Por 4 examining this switch-over, we examine the workings of income tax allction ins ‘most important application: the use of accelerated depreciation for tax pupoxs so straight-line depreciation for financial reporting. Tax Allocation and Accelerated Depreciation In the early years of the income tax allocation debate, the case favoring allocation wes often made by using what was, in effect, a single-asset situation. For example, assume that an asset with a five-year life and a cost of $15,000 and no salvage vabe's feoreciated vith 240% tax rate by the sum-of-the-yeary digs for wx purposed Py sragltline depreciation for financialaccounting. The reslts areshown tit 14.1. The fifth column shows an increase in deferred vanes in the first and second y= ‘and reversal and elimination in the fourth and fifth years, If this model were rp ae of real circumstances, the tax allocation situation would present few pole z noes tax beneiits above those stemming from straight-line depreciation nother Se life are pad bac in the eer yeas sation made ech year ang es Picea in Exhibit 14.2, where a pew at aon! the pater a until the firm Teaches a stable point It is assumed that be recon UGS. 35 before, P/IMS@ NeW asset each year and the disposal of an old 0 i So the same as in the first example. BY ing In Years 1 a gh atte depreciation are equal, so the tax benef °° or Co'use, ithe fim contin’ Pet™manent when viewed in the aggregHe not f Continues to the of *2%es contin, “xPand or if costs of new assets incress®, ¢ Appears to, indicate that Te ie Increase,¢In fact, the great bulk of ey mt ferred tax account does indeed increase$20) ‘ 4,000 3,000 fon j 3,000 3,000 7 = ‘ 2,000 3,000 4 (1,000) (400) i 4,000 3,000 (2,000) bom $15,000 $15,000 $0 ai ‘The situation of virtually permanent deferral has presented an enigma to account- ing stindard setters and theoreticians in terms of interpreting the credit and even caing into question the whole process of tax allocation where the potential for pemanent deferral exists. Interpreting Deferred Tax Credits Unquestionably, no legal liability arises s a result of using accelerated depreciation forincome tax purposes. The federal government's desire in allowing accelerated a well as shorter guideline lives (the Modified Accelerated Cost Recovery Stem [MACRS)) and prescribing the number of years of tax efor the vais clases ‘8885 to stimulate economic growth and modernize the nations products ‘racy by raising the internal rate of retum on capital investment projects pane "evel the government asa result of “excess” deprecation allowaness ken 11 88 "ss. Moreover, the problem simply disappears ifthe entepssr = — ‘ton rbot taxand book purpeses. The definition of Kea Mat canon ‘Accounting purposes, which are, of CoUtse, CO" thay joys, 2Y Of looking at the problem ts to view Need toa eee balance of te dstemed 8 Siagoge er0lover method From the individual ss ating gt though a new ‘loan’ i received WHOM Ot min Soe ag’ Payback on the older asct 258 9x GEPMOR NT zed exe might say char accounts payable MV towers 12tarepatd off may be replaced with new py deo Stticized because te payort of <2 ds. reality in accordance with uses obj8 MANE quay ate caeoit account Tsae Aen ween 0 omnis SON ee mathe Yrs Dit Deprecia art veara veers ws ions = “sao00 $8000 $2000 $5,000 2 $1000 ‘asset 5,000 4,000 3.000 2099 : Asset B 5,000 4,000 3,000 a Asset 5000 amy > Uy Ascot D 5,000 5000 dost cy —_ — Sw sasttF ae Sa Sn im $m) 31200 $49 Straight-Line Depreciation a ee Asset $300 $3,000 © $3,000 $3,000 $9,009 Ran 3900 -3,000 3,000 3000 sty Asset 3,000 3000 300 amp AssetD 3.000 3000 am emt 3,000 am rest iy $200 $4.00 $9,000 $12,000 $t5000 $i Excess of sum-of-the-years’= ee iguon aeanucen $2000 $3,000 $3,000 $2,000 o 8 depreciation Deferrat fexcess x. ae $000 $1200 $1,200 $200 pies ‘compared to the aceoy o if Which, of course, is tee 5 ae Decause the debts are paid offnae® i argument that deferred inven ne eS the cass or comprehensive a faxes are not the same as accounts oer Because of this Allocation with cleferred taxes interptel#M, ind APB Opinion No, 11 mit tats, deferred taxes were viewed 3 dee iatchlng concept, took reg en the income statement, under the an BCS that mone ence O¥EE the balance sheet (which 10" yy HE not be assets and deferred credits thi mi PEEme bottom-line net income ef ts eferedcredit overt the assets cs wn, This certainly eliminates . large ation—interpreting deferred tax cregi, me pscation for et F¢8X depreciation in : ‘amortization concurs WH benefits received In sue that ao stated: (0) EVENUC-PIOGUCINg orgy frevasl fDi ation and (2) tax reduction. Therty !e tial from prow" ervice over its life and accelerated depreciation ta renders relatively GFE me justification for net-of-tax depreciation, fgyg taken, there co ed not a method of valuation, Along ng 3! jure is still an allocation an ng the itl vers cannot be tral ng leet however, be transform mi anaes posible oentation to the timing difference problem sag pes albcation Under paral allocation, only those deferred credits on an aguepte tn, that can reasonably be expected to reverse in the foreseeable future are rere ‘the books." Thus, income tax expense for a given year is defined as the toial axing attributable to the given year’s operations, costs that are levied against the fim bab inthe current and future years, on a gross or aggregate basis. Hence, the deere tx credit i clealy definable asa liability, The balance of the deferced tax lisiltyacat represents the amount expected to be paid in the future, which is attibutbk tote current and past years’ operations on a gross basis. An example should clarify the partial allocation approach. Assume that fins oe ¢etrecaton i $20,000 each yeas and the tax rates 40, Deprcs® ie vine lifference between tax and book figures. The planning korkoas+ fncaeat eee figures are shown in Exhibit 14.3 (assets re ness, the numbers are “oe assumed to be accurate, For comparison andeoap! tees shown for comprehensive allocation. Beyond 209 Notice that the iaiy ae oe. ot {ex deprecation in 2007 sat spe Ue! Battal allocation is based onthe A antipated obligation, been 008 is less than book depreciation. This reals the aticpated “nonmayy 2X Payments in those years weuld bes Fatal aoaton seonsgeen ot C84 O8 DOOK deprecation. Ths HHT in cbigatone “probate it aa ae definition of liabilities in ae a ota is ices of economic benefits at Gr rene yee ey to uansfer assets, 9 esl oft tag ‘ax credits arising under comprehensive rnsformed of related fo any current Value meas ed into general price-level-adjusted depecg’ ether d ‘With the SOMPrehensiye Mogae49 ound the results useful for cash budgeting and planning, There is some support in the literature for partial allocation. In addition, the United Kingdom essentially adopted it for years beginning after January 1, 1978, although itwas abandoned in 1999, Agency theory must also be considered In regard to partial allocstion. How likely {sit that management favors an accounting method that lowers the curtent year’s ‘income based on a future contingency? Furthermore, management could ako use the ‘problem of verifiablity as an additional argument to support any desire not to lower income in the current year’* Another significant theoretical consideration relative to partial allocation is the future events problem. Notice in Exhibit 1433 that assets A2 and A3 partially block the ‘tepaymient of acoelerated depreciation benefits received in earlier years, However, as of the end of 2005, the acquisition of assets A2 and A3 has not yet occured. The acqui- | sitfons of the assets are wholly executory events as of the end of 2005, even though | Meineffectis taken into account in the allocation entries. The impact of future events ‘on financial reporting can become an extremely important topic in accounting theory deliberations (future events were discussed in Chapter 12), ‘One more question remains in tems of partial allocation and comprehensive lia- 7 Since the resulting credits are interpzeted as liabilities that mature beyond a ar, is discounting of these values appropriate?5920 mona wxexperet 420) Deford tx rm of REINS Ci eter ae HN gam core tox ably ‘03 toceretaxUSBeNY ee ae geno _Oeferred taxcredit or ability 0 ocr atnity san t00 ~$40001 Income tax Uability son year 207 Year 2007 ‘Income tax expenss@: 5,400, Income tax expense 5,400 eter ata o Delerredtaxcredt or abilty 40 ncoene tax Usbitity 5460 Income tax liability 5d ($20,000 - $4,609) Near 2008) Year 2008 poeta 5400 Income tax expense 5400 Fee oe0 Deferred tax creditor Unbity 1,082 ypeeneeys 480 Income tax tiabitity 10 Discounting Deferred Tax Liabilities ae as bonds payable and noncancellable leas, ae oF Lmpliet interest accomplished by discounting future payments y th ie ‘Tate. Similarly, APB eres ‘otes reeeivabh 'y, APD Opinion No. 21 requires that noalnt Me must be discounted at thelr implicit interest rae, Consisteny ui ‘ ‘payable nithowts cS owns of deferred tax assets and liabilities ang gg? iy pret re interest sate, test problems are by no means insumounee ey an appror' Net Operating Losses and Income Tax Allocation negative view of treating tar-loss canryforward, , ‘No. 11. It did allow for reducing ex: ates id its predectss0% Are operating loss on the income: fone sce srry eaforvard over the deferred tax Lables cannot be bogs Sey Chats No. 109 does a complete turnaround on booking tax-loss a sone sta alos carryforvards are now booKed subject tathesaneya ir oe allowance procedures discussed previously for deferred tax asets The aro poard_and comectlyso—is thata close relationship exls!s between dead, ‘sets and tax-loss cartyforwards and the fact that they both have the characerig., Of assets as defined by the conceptual framework. “Anet operating Toss arlses if deductions exceed gross income fora table yy the 1954 Internal Revenue Code, Congress recognized that it was unfair to tx tims in profitable years without allowing any benefits in loss years. Consequently the 194 code included provisions for carryback and carryforward of net operating kis Tie carryback now covers a two-year period, and the carryforward period encompass 20 years. An interesting side note, the carryback alternative is available to cxpue- tions, but not individual taxpayers, Since the U.S, Supreme Court in 2010 rafcasd corporate personhood and concluded that political expenditures can be made by it artificial individual, it appears that the income smoothing (tax reducing) treatment’ avallable only to “special persons.” Since 1986, the Internal Revenue Service (IRS) has become more restrictive tems Of recognizing tax-loss carryforwards coming from acquired corporations. Continw'r of-business enterprise requirements are the key. To use tax-loss carryforward, ith ae ‘tthe acquiring corporation must either continue the traditional Wt ‘corporation of use a significant portion. of the loss corporation’ 2858 business. Despite the more restrictive treatment of the IRS, the 20-year yin ‘Provides a strong justification for treating taxc-loss carryforwards ts assets acs GEORG in SEAS No. 109. If there are uncertainties of realization, avalualot 3" Sanbeset up rsducing both the deferred tax asst receivable and teint? Em pirical Research on Income Tax Allocation Over the a Ay Aspects of income ce 2 fally extensive amount of empirical 38 CT! me tx allocation, Two carly studies were done by Bexeri™!Chapter, ler 14 aco me Taxes and Financia ieial Account ing they found that i prt 08D, : income, using j be ition with security price ee ane eatioction.Theitsecond st eran spot ; dy sus ae ot gsanyiet than exis bested that the neko nc sos yes than income aX existing cuenta, Teo meio ng ye eet reseaze also generally Hon using exist, a ates i cee pene ae ah lee tion nl egresion analysis lability orientation of Stag se ce Sve tar of ta He found that Skas nL Of SFAS No, ce i lsatement detentions oe ae stat went other balance ‘sheet m¢ asses, labile, gene fa ee te teed ty presto ‘ved tax abilities to firm val es Menbefon oe en tax ates increased. under nde STS Noliornter tan es paste improved value releva Renee ee clini aa n of net is Be Ay ae Ry Wiccan one ie atte Soe oer ed at asin x Opiaion No. 11 to dis Somenbat complementary to oe od Rhranian.® Th thedyes study : oe ee ea St cecil nA Espahbodi, Fs epee incm x ts in the 1 ity price reactions tothe! a OpnonNo, 1 toanasset- lability as lowe ye pe ng fon A ‘ncome increase owing to the ane a retest at eee ial lowering of deferred tax iabiltes he Se Sapte’ oe a ase oe oa ; tical costs to firm: ma Saeed ooo Se eae ae fe ae ae after the exposure draft releases prec Ne releases, eee gs) = a and 109. As was expected, they found favorable price Cobh e ‘utoveghed the potential increas in pital cos vec pension corporate officers. poe ccs ame a> allocati ee ee ‘were interested in cash flow te eee eee ca = ett that for one years eit eee cee into ae eee per id ee ee ean ites Whee EN nocuent) . Teng years income fax Paves PN han a model simply 0s id for the following year aver multivariate cash flaw tax allocat tion, haa ete ‘Previous an years taxes paid relating 9 the rae from their model in the Lorek- Willinget inodel (Chapter 13), which Bere! NE, pode ji following years PS My cash payments for Mil it {s intuitively obvious that fons of the Moferred tax liabilities along. ve and x pay su) fas ye ding increases 2 ee pci eee eaing this in no way ee ad Rporance and sell, oa ed is made. by Givol yn. THEY ae Ta let important so impor oui pore ea ea ann Mama Act too colon oan npr puats 20 A ng fom OS Fe autre in the dered apuity ones i 'Y @8 a real liability: or)986 tax at was seen 4 1684N8 10a atc Coy deferred icipated passiB™ ‘ors appeat to view taKCS ag a eR aerate ees TS ansed by te study, 1984 101986, APB Opiagn OU Ng bie in effect. Also note the complementary 4.2 "Un, at in the Peet credit SPE, Erpahbodl and Tehranian previously, dint study to the one rer er studies concern the valuation allowance thay <> ‘Two somewhat ‘assets, Miller and Skinner found that valuation aljoy, «St 10 ff ee large deferred tax liabilities or greater expec soe saul ‘of which are available to absorb the reversal of deferreq able income williams generally had similar findings to those o¢ iva Behn, satin Also, in their work, note the conflict between relgan sentry adsing (rom booking valuation allowances.” A more recent a aaanad aad Wong found that companies in some industries use valuation a to ‘smooth camings toward the consensus forecast and historical amigas share." These results seem to contradict Miller and Skinner, who found no, thet vatuation allowance was wed to manage earnings. However, Schrand an Weg study focuses on a more homogeneous sample of firms. Some emplical research also questions the usefulness of Income tax aloco, Chaney and Jeter found a negative association existing between defered tax mj security retums.*They found high variation in deferred tax balances, which tig thought might indicate the presence of earnings management. Chandra and Ro ka} somewhat similar results in their research. Their interpretation was that the make appeared to view deferred tax liabilities as a permanent transfer; hence it was wally disguised equity. The market may well be rewarding firms with large deferred tals billy balances because these firms appear to be minimizing thelr tax paymexts & should be pointed out that the years examined in both these stuclies dd mit eee time when APB Opinion No. 11 was still in force. Oanieine disagreement, it appears on balance that SFAS No. 109 {sb an improvement over APB Opinion No. 11. future International Accounting Standards (IAS) TAS 12, Income the FASB’s eee i: based on the balance sheet liability approach, hes Fay differences. Gace res ee (2X assets and liabilities for reognilas a the same, a shoreteny 2» 2h4 FASH's underlying approaches to income cee Understanding, the ane oo SeCE Project was included in the Memo o ADECUSSION Memorarrecn © Purste Convergence between IFRS and USO vas later dropped peer *85teleased in 2008 that would examine incomes ines tilercatatornor Sgenda® Under FASB, deferred tax accoults recogni HS 12 clasts apt SePending on the account to whichth*F Ghee fue taX assets and liabilities as non’ i wB NODE th tx eee UY transactions atthe buyels Pe Ct intercompany transactions at the ee!Chapter © Income Tees and fy two proposed accounting standards ont eal affect accounting for income ee tenes wpe rcome taxes for intercompany transfers. Approval oft th pe et so a coin of income tax consequences of intercompany ene cae iy ths would lead to convergence with TASB standard on eee fas. econ transfers. The second proposal is on the presentation of deferred ee erm propose clasiication of all deferred tax assets and liabilities as non- eesti classified Statement of financial position. This too would result in con- sence wt RS. Improving Accounting Standards LO eee Defered tax assets and liabilities should be discounted to their present value. As dis- ‘used previously, the discount rate for deferred tax liabilities should be for a Joan tfsmilr duration, repayment schedule, and sisk undertaken by the lender, For a ered axassets,asingle rate mightbe prescribed since the government's thepaye Therire since the firms risk Is low, the rate should be determined based ona ySi7 highualty investment with a very Jow rate of risk. Summary Tneame tax allocation appears based on the matching concert: ‘allocation process is, however, open to serious question. AP! ‘comprehensive allocation using the deferred method of pres wae alletion isa form of rigid uniformity because the a potntialy important relevant circumstance, is ignored. tegthe question of balance sheet interpzetation and ase) een agn of Balance gras No. 96 adopted 2 MOUNT cated mi euertanatey hindered by very conservatives gr tho aps the princi Splem of comprehensive omy ral bocce wen Pete jation is used fw oes proc eee reporting purposes. A possible defense of is. -view, which employs an individual ot ok seticized on the grounds that tax Hable wend latter are paid off on an individual basis, te Consequently, another view, paral allocstio™, develo cof se Son employer only its foreseen tna ete 8 4 TY esta in se Aa of eet oe aeqrectation exceeding total pe Ce Tes Hence, paruatallocatON sana Strinite ualORBNY, gut 00 , parla allo esto of veriiablity, IMS pcks ites. ta allocation 18° Oe Phe estimated. omer 4¥ONE: gna abt tion as well as the tax f9° cents in ne an Problems and the rte off imancial Accounting 431te aang TCO from its predecessors by proyi, ic ng departure ha sTASINO. 109 aapally for both ee ane a tl S = 100 the grounds of fal cep ll canbe tot ae valuation allomances may ey t= ssets. . fo. 109, Zag a ss di isthoug! ar ae allow the ical teal eene shows that SAS No. 109 is ie answers ace is No. 11. Cash low prediction is enhanced by ing : vant than allocation. asa Questions 1. Asa type of allocation, why is income tax allocation unique? i ive allocation an example of to depreciation, why is comprehensi ya ecco eat ata slscton a eemgieo4 lee uniformity? i bottom-line result as . Although netoftax depreciation gives the same compe. ; Rae eae any financial ratios that are affected by the choig between these methods? 4 How do the deferral and liability methods of implementing comprehensive allocation differ? Whaat is the rollover defense of the lability Interpretation of deferred ‘taxes, and how has it been attacked? 6. Whatis the justification for. discounting deferred tax liabilities ‘under either com prehensive or partial allocation? 7. What is the interpretation of income tax expenses under partial allocation? 8. What is permanent deferral? 9. How did SFAS No. 96 differ from. APB Opinion No. 11? At HOW does SEAS No, 109 differ from SPAS No, 967 AL, Refer to Exhibit 148. Under srAs Ni a ition aes (0. 96, there was a “conservative” recogni! oaitleed ax asses. As a result the $155 deferred tax asset in 1997 needs of epg et Mar ingen rege arteetla the area of deferred tax assets and liabilities (08 this capt 13 Doyou eg ny batlcula dttenty relative tg elo ara Payinents in a aes Allocation ean improve the prediction of fut™® U4 Using tax dopreca aa Pea ‘or tax purposes and straight-line depreciation 0" svete tax Lables lead to trae future cash flows?‘hapter ta tn ome Taxes and Fy nana Account nog ge vlan aewance wed In IMEOME tax allcaon? axis camyfornands be booked? Explain, ; problems, and Writing Assignments copanit 148, Assume that in 1996 accounting income Is 1 een) difference: Installment sale income of $350 Pe a eiogtutis nt exed unt 1997 when the cash is collected, ee Required: ‘prepare the tax entries for 4996 in accordance with SFAS No. 109. 2, Nowell Company 15 experimenting with comprehensive-liability income tax allo- tation called for in SEAS No, 109 but, in addition, they are employing discounting. anporary ferences exist up to the year 2000, Shown here is schedule of tox depreciation, book depreciation, ‘and income before depreciation. Eee as ee eee Income Before ‘Tax Depreciation Book Depreciation Depreciation Year AL AD AL AQ mos $50,000 $35,000 $300,000 7008 40,000 $60,000 35,000 $50,000 490,000 207 39,000 0,000 25,000 50,000 420,000 _m somo __ asm sspoo pn ‘The tax rate is 45%6. The discount rate is 8%. Required: Prepare income tax entries for 2005, 2006, 2007, jeferred », 2006, 2007, and 2008, discounting defers” tax liabilities at 89, Why does using discounting. fae Aeonger asset 20 orientation than not discounting deferred tax liabilities? 3. Accounti Cor i ing income for the Kolbow Companty for 2995 of operations) ‘Was $1,700,000. Differences between Pook i as e 433,