Which of the following situations creates a deferred tax asset under USGAAP? ______Curent taxable income is__________the difference is (a) larger than pretax income on IS______temporary (b) larger than pretax income on IS______permanent © smaller than pretax income on IS______temporary (d) smaller than pretax income on IS______permanent
DTA = when you pay more taxes on financial statements than on the tax return difference is temporary C) smaller than pretax income, temporary
supersharpshooter Wrote: ------------------------------------------------------- > DTA = when you pay more taxes on financial > statements than on the tax return > > difference is temporary > > C) smaller than pretax income, temporary thought it wa other way around – you pay more to IRS than what is on I/S, so you get DTA
daj224 Wrote: ------------------------------------------------------- > supersharpshooter Wrote: > -------------------------------------------------- > ----- > > DTA = when you pay more taxes on financial > > statements than on the tax return > > > > difference is temporary > > > > C) smaller than pretax income, temporary > > > thought it wa other way around – you pay more to > IRS than what is on I/S, so you get DTA one example being warranties
daj224 Wrote: ------------------------------------------------------- > supersharpshooter Wrote: > -------------------------------------------------- > ----- > > DTA = when you pay more taxes on financial > > statements than on the tax return > > > > difference is temporary > > > > C) smaller than pretax income, temporary > > > thought it wa other way around – you pay more to > IRS than what is on I/S, so you get DTA you are right DTL: GAAP pretax income > IRS taxable income DTA: IRS taxable income > GAAP pretax income the answer must be A
and tax loss carryforwards
had posted this on the L2 List when somebody asked a qn. there A DTA is recorded when a. Current Income > Recorded Pretax income Happens under 2 situations i. Income and/or gains to be reported in future periods for book purposes are being reported currently for tax purposes. or ii. Expenses and/or losses being reported currently for book purposes are being deferred into future periods for tax purposes. Under such circumstances, future reported tax expense (on the financial statements) is greater than the actual income taxes owed at that time. US GAAP has specific rules for dealing with reporting of the DTA. DTA can be recorded on the balance sheet when deductible temporary (timing) differences generate a tax credit carry forward or an operating loss. However, DTA must be continually substantiated by company management and its external auditors. In the event that it is likely that some portion or all of the DTA reported on the BS will not be realized, then a valuation allowance must be established to reduce the DTA. Additionally any change in the Valuation allowance during an accounting period must be reported as part of the income from continuing operations (with the exception of when it is generated by unrecognized changes in the carrying amounts of assets or liabilities). Operating losses result from tax deductions in excess of tax revenues. Operating losses can be carried back and applied to previously taxed income. when this is done, the entity books a tax refund receivable, an asset whose collectibility is assured. Operating losses may also be carried forward to future periods. In this instance, the entity books a DTA. Valuation of the DTA is contingent upon likelihood of future earnings. If it is more likely than not, that the earnings will not materialize, the entity must set up a valuation allowance. An analyst should be cautious whenever mgmt can use its discretion in determining (changing) the valuation allowance of its DTA since this discretion can be used to manipulate company’s reported earnings. E.g. by reducing the Valuation allowance for a particular period, mgmt can inflate the company’s net earnings. To eliminate this kind of distortion, the analyst must remove the impact of the valuation allowance in the analysis of reported net earnings. CP
good, we agree on A!
A. only if your current taxable income is greater than pretax income, you can create DTA. ie. you have to pay more taxes now to IRS than your pretax income, but to smooth earnings you just can’t pay it, ie. you’ll create a tax asset, because in future you expect your pretax income to be greater than taxable income, so in the future you’ll pay more taxes but IRS won’t want it, so you’ll reverse your DTA. I know i dont make sense to myself, but this is difficult.
A all the way!
A DTA is created whenever losses or deductions are allowed under GAAP but not allowed under the tax code (waranties and bad debt for instance). Since no dedution is made for tax purposes, current taxable income is larger. Only temporary differences create DTL or DTA. Permanent differences affect only the current year. answer is A.