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Chapter 19: 7Q (page 1093)

What is the difference between a future taxable amount and a future deductible amount? When is it appropriate to record a valuation account for a deferred tax asset?

Short Answer

Expert verified

A valuation account is the type of account maintained by an organization to measure the carrying amounts of assets or liabilities from one balance sheet to another balance sheet.

Step by step solution

01

Difference between a future taxable amount and a future deductible amount

Basis

Future taxable amount

Future deductible amount

Meaning

It reflects the future taxable amount of an organization based on pretax financial income.

It refers to the future deductions of an organization that can be claimed while filing returns.

Effect

Increases the taxable income

Decreases the taxable income

02

Deferred tax assets recording

The amount of deferred tax asset is recognized under the comprehensive deductibles arising due to temporary differences. If there is a case where a particular portion of the amount (more likely around 50%) cannot be realized under the deferred tax asset, then it should be reduced by the valuation account.

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Most popular questions from this chapter

In 2017, Amirante Corporation had pretax financial income of \(168,000 and taxable income of \)120,000. The difference is due to the use of different depreciation methods for tax and accounting purposes. The effective tax rate is 40%. Compute the amount to be reported as income taxes payable at December 31, 2017.

Dexter Company appropriately uses the asset-liability method to record deferred income taxes. Dexter reports depreciation expense for certain machinery purchased this year using the modified accelerated cost recovery system (MACRS) for income tax purposes and the straight-line basis for financial reporting purposes. The tax deduction is the larger amount this year. Dexter received rent revenues in advance this year. These revenues are included in this year鈥檚 taxable income. However, for financial reporting purposes, these revenues are reported as unearned revenues, a current liability. Instructions (c) How should Dexter classify the deferred tax consequences of the temporary differences on its balance sheet?

The following facts relate to Krung Thep Corporation. 1. Deferred tax liability, January 1, 2017, \(40,000. 2. Deferred tax asset, January 1, 2017, \)0. 3. Taxable income for 2017, \(95,000. 4. Pretax financial income for 2017, \)200,000. 5. Cumulative temporary difference at December 31, 2017, giving rise to future taxable amounts, \(240,000. 6. Cumulative temporary difference at December 31, 2017, giving rise to future deductible amounts, \)35,000. 7. Tax rate for all years, 40%. 8. The company is expected to operate profitably in the future. Instructions (a) Compute income taxes payable for 2017. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017. (c) Prepare the income tax expense section of the income statement for 2017, beginning with the line 鈥淚ncome before income taxes.鈥�

Explain the meaning of a temporary difference as it relates to deferred tax computations, and give three examples.

Mitchell Corporation had income before income taxes of \(195,000 in 2017. Mitchell鈥檚 current income tax expense is \)48,000, and deferred income tax expense is $30,000. Prepare Mitchell鈥檚 2017 income statement, beginning with Income before income taxes.
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