ACC 232 1st Edition Exam # 2 Study GuideCh 19 & 20 Test8-12 Multiple Choice1 pension problem- 2 years- Worksheet- Journal entry1 Deferred taxes problem- Compute entry- Income statement- Balance sheet- No tax timing- Permanent differencesChapter 19Pretax 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 expenseTaxable 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 payableDifference between income tax expense and income taxes payable is the deferred tax amount.Classified as either deferred tax liability, or a deferred tax assetTemporary 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 yearsTaxable amounts increase taxable income in future years.Deductible amounts decrease taxable income in future yearsPermanent 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 inwhich they occur, do not give rise to future taxable or deductible amounts, companies recognize no deferred tax consequencesDeferred 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 yearCurrent tax expense-amount of income taxes payable for the periodDeferred tax expense-increase in the deferred tax liability balance from the beginning to the end of the accounting periodDeferred 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 expenseDeferred 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 differencesIncome Tax Expense 500,000Deferred Tax Asset 400,000 (Deductible temporary difference* tax rate 1,000,000*40%)Income taxes Payable 900,000 (given)More likely than not that it will not realize the deferred tax assetIncome tax expense 100,000Allowance to reduce deferred tax asset to expected realizable value 100,000Accounting for Net Operating LossesLoss Carryback-can carryback 2 yearsLoss Carry forward-can offset futureChapter 20PensionsContributory-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 itNoncontributory-employer bears the entire costQualified 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 assetsDefined benefit plan-employer pays employee a percentage of their ending salary each year after they retireVesting-after a certain number of years of working for a company, they can achieve vested benefit status,which means the benefit is non-forfeitableFuture 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 donot exceed the future pension benefit obligation, then the pension is underfunded.Pension assets and pension benefit obligation is not on the company’s balance sheetShow overfunded pension asset, underfunded pension liabilityComponents of Pension expense:1. Service costs - pension costs created by work done in the current year2. 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 obligation3. Actual return on pension assets - reduction in the pension costs - Pension plan assets -ending minus pension plan assets - beginning - contribution + benefits paid4. Amortization of prior service costs5. 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