Chris Green, CPA, is auditing Rayne Co.'s 2016
financial statements. For the year ended December 31, 2016, Rayne
is applying GAAP for income taxes. Rayne's controller, Dunn, has
prepared a schedule of all differences between financial statement
and income tax return income. Dunn believes that as a result of
pending legislation, the enacted tax rate at December 31, 2016,
will be increased for 2017. Dunn is uncertain which differences to
include and which rates to apply in computing deferred taxes. Dunn
has requested an overview of GAAP from Green.
Required:
Prepare a brief memo to Dunn from Green that identifies the
objectives of accounting for income taxes, defines temporary
differences, explains how to measure deferred tax assets and
liabilities, and explains how to measure deferred income tax
expense or benefit
To: Dunn
From: Green
Subject: How to measure differed tax asset/liability
Source: Accounting Standards available
Accounting profits shown in Company's books or Financial Statements differs with IT profits. One such reason for same is timing difference. The Timing difference arises due to difference in rate of depreciation, method of depreciation, expense allowed for normal business but not allowed as per Income tax provisions are concerned.
Based on the impact, the company has to calculate deferred tax asset / liability.
Deferred tax assets indicate that you have accumulated future deductions -- other words, a positive cash flow -- while deferred tax liabilities indicate future cash outflows. For corporations, deferred tax liabilities are netted against deferred tax assets & reported on balance sheet.
In easy words, deferred tax liability is a provision for future taxation.
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