ACC 232 1st Edition Exam 2 Study Guide Ch 19 20 Test 8 12 Multiple Choice 1 pension problem 2 years Worksheet Journal entry 1 Deferred taxes problem Compute entry Income statement Balance sheet No tax timing Permanent differences Chapter 19 Pretax Financial income financial reporting item income before taxes income for financial reporting purposes income for book purchases determined according to GAAP leads to income tax expense Taxable income income for tax purposes tax accounting term amount used to compute income taxes payable determined according to IRS tax code leads to income tax payable Difference between income tax expense and income taxes payable is the deferred tax amount Classified as either deferred tax liability or a deferred tax asset Temporary difference difference between the tax basis of an asset or liability and its reported carrying or book amount in the financial statements which will result in taxable amounts or deductible amounts in future years Taxable amounts increase taxable income in future years Deductible amounts decrease taxable income in future years Permanent Differences result from items that enter into preta financial income bt never into taxable income or ender into taxable income but ever into pretax financial income affect only the period in which they occur do not give rise to future taxable or deductible amounts companies recognize no deferred tax consequences Deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year Current tax expense amount of income taxes payable for the period Deferred tax expense increase in the deferred tax liability balance from the beginning to the end of the accounting period Deferred tax asset represents the increase in taxes refundable or saved in future years as a result of deductible temporary differences existing at the end of the current year Deferred tax benefit results from the increase in the deferred tax asset from the beginning to the end of the accounting period negative component of income tax expense Deferred Tax asset Valuation Allowance recognize a deferred tax asset for all deductivle temporary differences should reduce a deferred tax asset by a valuation allowance if it is more likely than not that it will not realize some portion or all of the deferred tax asset More likely than not at least slightly more than 50 Recording temporary differences Income Tax Expense 500 000 Deferred Tax Asset 400 000 Income taxes Payable Deductible temporary difference tax rate 1 000 000 40 900 000 given More likely than not that it will not realize the deferred tax asset Income tax expense 100 000 Allowance to reduce deferred tax asset to expected realizable value Accounting for Net Operating Losses Loss Carryback can carryback 2 years Loss Carry forward can offset future 100 000 Chapter 20 Pensions Contributory employees bear part of the cost of the stated benefits or voluntarily make payments to increase their benefits employee puts money in to the plan and the employer matches it Noncontributory employer bears the entire cost Qualified pension plans plans that offer tax benefits permit deductibility of the employer s contributions to the pension fund and tax free status of earning from pension fund assets Defined benefit plan employer pays employee a percentage of their ending salary each year after they retire Vesting after a certain number of years of working for a company they can achieve vested benefit status which means the benefit is non forfeitable Future Pension Benefit Obligation vested and non vested benefits at future salaries FASB Money set aside with an investment company for the pension obligations Pension assets If pension assets exceed the future pension benefit obligation then the pension is overfunded if pension assets do not exceed the future pension benefit obligation then the pension is underfunded Pension assets and pension benefit obligation is not on the company s balance sheet Show overfunded pension asset underfunded pension liability Components of Pension expense 1 Service costs pension costs created by work done in the current year 2 Interest on the liability we use a discount rate to determine the future liability and we add interest costs at that rate times the future pension benefit obligation 3 Actual return on pension assets reduction in the pension costs Pension plan assets ending minus pension plan assets beginning contribution benefits paid 4 Amortization of prior service costs 5 Gain or loss due to vitality of return on plan assets and changes in the pensions benefit obligation caused by the actuaries Know how to do the Pension worksheet and corresponding journal entries