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“And welcome to the session this is professor farhad and this session. We re gonna gonna look at additional cpa questions that deals with the third taxed asset and the tax liability. If you need any help with this session. Where i suggest you do is you go to my intermediate accounting course in under chapter 19.
I have a detailed explanation of the topic including examples. But what i m gonna be doing now is working few cpa questions that you might see on the exam. And how to solve them so let s go ahead and get started so the first question. Let s take a look at this session.
And this session. Deals moke mostly with income tax expense. How to compute income tax success. Because that s important.
So let s take a look at this question for year. And the december 31st t. Company reported. Pre tax financial income of seven hundred and fifty thousand.
So this is financial statement income. Seven hundred and fifty thousand taxable income of 650. So taxable. Which is the irs income taxable income.
It seems. There s a difference of one hundred thousand taxable income of 650. The difference is due to accelerate the depreciation for income tax purposes. So what they re saying is the reason we have less taxable income because we have more depreciation okay.
And that s the only thing so basic simply put the difference between the 750 and the 650 under taxable income. We have one hundred thousand of more depreciation the company s effective income tax rate is 30 tire made estimated tax payment of ninety thousand that s fine what amount should tire report as be careful current income tax expense er. I mean highlight the word current. So what is the current income tax expense.
I m gonna go through the whole entry and show you how you compute this current income tax expense once again as i showed you in previous videos once you have your taxable income. You multiply your taxable income by 30 by 30 percent. So let s go ahead and do so so. If i take 650 oops.
Just make this smaller maybe. Let s see let s make it bigger okay there we go so i m gonna take 650. Okay. I m gonna make i m gonna take 650 thousand.
Which is taxable income multiplied by 30 percent and that s gonna give me one hundred and ninety five thousand and guess what that s my answer because current income tax expense is how much you have to pay to the irs. So from the journal entry. Let me show you from a journal entry how it works taxes or income taxes payable income taxes payable you credit this account 195000. And this is your what you have to pay to the irs.
This is the chen that you write that you have to write to the irs. Although you already wrote money tells them that that s irrelevant. They won t the expense the expect. Deal i m sorry they want the current income tax expense 195000.
So that s your answer. But i m gonna complete the entry just to show you how it works because they could have asked you also about what what could have been the third what s what could be the deferred income tax expense so here they asked you about the current they could have also asked you what is the deferred income tax expense what s the deferred income tax expense find the difference between the two the difference is a permanent difference of a hundred thousand they already told us that it has to do with depreciation well that the third that the third component is one hundred thousand times 30 equal to. 30000 therefore i credit the third tax liability 30000..
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Okay why it s a deferred tax liability because i m taking the expenses now i already deducted the 100000. I already deducted to one hundred thousand on my taxable income therefore in the future. I don t have it therefore i m gonna have a liability. That s why it s a lot i m gonna have to pay more taxes that s why it s a liability.
So what s your if they ask we could also ask you they could ask you what s the current which is we already figure out the current 195 they could ask you what s the deferred. Which is thirty thousand they could they could simply ask you what is income tax expense. What is income tax expense under the scenario it s your income taxes payable plus your deferred tax liability so you income tax expense equal to. 225000 and notice 225000.
Is one of the answers okay so. But that s not the a that s not what they re asking you they re asking you what s the current. The current income tax is what is what you have to pay to the irs. Which is one hundred and ninety five thousand so the answer is c.
But again they could ask you what is the the third component. Which is thirty thousand and what s total income tax expense. Which is two hundred and twenty five thousand okay let s take a look at another question alright. Let s take a look at this question also it involves computation.
Which is good because it will help you understand the concept much much better okay so q company reported a net deferred income tax a set of nine thousand as its december 31st year one balance sheet so we have the third taxed asset and we have in there 9000. That s what we are told that is for year one for year two the company reported pre tax financial income statement of three hundred thousand. So from a financial statement income. They have three hundred thousand temporary differences of one hundred thousand resulted in taxable income of two hundred thousand so for irs purposes.
Their taxable income is two hundred thousand and december 31st gwen had a cumulative temporary difference of seventy thousand. So notice the temporary difference is a hundred thousand. But the cumulative ones in other words for this year owned only for this year seventy thousand. It means something coming from the other year okay so let s see what the question is the effective tax rate is 30.
And it s december 31st here to income statement. What should quinn report. It as the third income tax expense. So another asking you for that the third component.
So since i know they re asking you for the third component. Let s find the current component. Because if you take two hundred thousand times. 30.
And that s gonna give us. Sixty thousand that s not the answer. This is the sixty thousand but this is the current portion of the income taxes they re not asking me they re asking for the deferred. Remember the total income tax is the current plus to the third so we find the current which is we don t really need this.
But they want us to know the current so what is the deferred component. Well there s a temporary difference of a hundred down so notice. There s a temporary difference of a hundred thousand between the two okay. And what is it what s that temporary difference well part of it is the is the 70000.
Part of the temporary. Difference they re telling us right here part of it is the 70000. So if we take the seventy thousand times. The enacted tax rate.
30. Percent seven thousand times 30. Percent..
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Will give us twenty. One thousand well is this the answer. That s not the answer yes. This is part of the difference.
This is so the twenty one thousand is the third tax liability of the income tax expense. So let me let me do the entry first let s i think i think the entry will help you understand this so first let s credit income taxes payable. Which way what you have to pay for the heiress s thirty thousand then the seventy thousand temporary difference is created a deferred tax liability because now we have less taxes we re paying less in taxes it means in future years we re gonna lose this deduction that s seventy thousand which has resulted in twenty one thousand and the third tax lie there are therefore the third tax liability is twenty one thousand excellent okay and notice. It s one of the answers.
But be careful that s not the answer the difference is not seventy. Thousand. The difference is one hundred thousand so the difference between financial income in irs income is 100 thousand 70000. Is explained by this cumulative difference and we have another thirty thousand.
The other thirty thousand is what what s that other thirty thousand that other thirty thousand is a reversal of the nine thousand the third taxed asset you remember he had a nine thousand of the first acts asset. If you take thirty thousand times. Thirty percent that s gonna give you nine thousand so what happened the other what explain the difference between three hundred and two hundred thousand part of it is the seventy thousand and the other part is the thirty thousand that s reversing of the third taxed asset. So simply put we re going to be crediting the third tax asset of nine thousand so we re going to cry the first text and set of 9000 now we can find our income tax expense.
Our income tax expense is 60 plus 21 plus. 9. So the income tax expense. I should have this is not clean anymore so it doesn t matter so income tax expense the total income tax expense is 90 down set so they re asking me about the deferred income tax expense that the food income tax expense is those to the credit of the third tax liability.
The credit to the third taxed asset and the credit to the third tax liability. Therefore be the third tax. Think did the third income tax expense is thirty thousand which is the credit that we have that we used up the reversal of the third tax asset and the creation of the deferred tax liability. Those two are the third tax expense and they ask you what is the current.
The current would have been sixty thousand would have been the answer where they asked you what is the current income tax expense and they ask you what is the total the total is ninety. Thousand. The total is the total is the current plus to the third. The current plus.
The deferred so hopefully. This is also a good exercise because it s gonna show you what s the current. What s the deferred. Which is the third year as part of two component.
And what s the income tax expense. Now. If you don t understand the formula of how to compute income tax expense. Either view my lecture or prior lectures.
Where i cover this okay so make sure you know this okay. But let me do it here anyway just just kind of since i mentioned it so how do you compute income tax expense income tax expense equal to income taxes. Payable. What you have to pay to the irs okay plus plus any decrease to the third tax asset.
And notice here. What happened the first tax asset went down any increase to the third tax asset. If the deferred tax assets went up it s an it s a minus plus any increase that the third tax liability. This is what happened here in the third tax liability went up and that s why we added this to the our income taxes payable any decrease in the third tax liability the third tax liability now this is the formula.
This is the formula to compute income tax expense. Which is here so income taxes. Payable..
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Plus. The plus the decrease and eta minus the increase in dta plus. The increase in ddl. The decrease in d ts.
Okay. Let s take a look at maybe one more question. Yes. One more question.
Let s take a look at this question. And it s here for income. Statement. C.
Company reported income before income taxes of 30000. All right so this is basically financial statement. Income of written up thirty three hundred thousand c. Estimated that because of permanent differences.
Notice here. It s a permanent not temporary taxable income for the year four would be qat so irs income. It s two eighty and the difference between them is twenty thousand. But that twenty thousand remember is a permanent difference not temporary.
It s like i m talking like my son my son when he says. I m happy then he would say i m not sad when he says every time he sees something if it s not ours. He said. That s not ours although it s not he doesn t have to say this.
But basically i m like talking like a two year old kid. When we say permanent difference permanent difference means. It s not a temporary difference. So be careful be careful that it s given on purpose for a.
Reason actually during 2004 c. R made estimated tax payment of. 50000 that s. Fine they wrote checks of 50000 to the irs that s fine.
Which were they re better to income tax expense. It s okay so what they did is they wrote a check and they debited income tax expense. 50 and they credited cash 50. It s fine okay.
That s fine. See it is subject to a 30 percent tax rate. So what s the question. What amount should see reported as income tax expense.
So what should be income tax. Expense simply put not the current not the deferred everything. What should be income tax. Expense.
Well let s start with this. What s what should be income tax expense well first we take the irs. What we have to pay the irs times..
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30. Percent. Let s find out how much we have to write the check for two hundred and eighty thousand times point three that s gonna give us eighty four thousand okay that s income taxes payable so we re gonna debit income taxes payable eighty four thousand this is what we have to pay the irs we already paid fifty thousand so just basically forget about this entry. Okay because i m gonna do it as if we ignoring this entry because it s not relevant for us so income taxes payable eighty four percent now what is income tax expense as i showed you in the previous slide income tax expense.
Which is i can t see any more because i don t see if i can find it if not you re just gonna have to let me see i don t think i can i don t think i can find it because i wrote over it remember income tax expense equal to income taxes. Payable plus. The increase in the decrease in dta. The increase in detail so on and so forth okay now do we have any bta or dtl in this in this scenario.
We don t have any you might be saying you might be saying hold on a second don t we have a 20000. Of differences. That s a permanent difference permanent difference. No that s right it will write this down does not arise to the third tax asset or the third tax liability permanent differences is something that s gonna either go on the financial statement or only on the tax return and never on both it will never reverse therefore if it never reversed.
There s no reason to have a deferred tax tacit or deferred tax liability. So simply put my income tax expense since i don t account for this. 20000 my income tax expense equal to. 84000 i m done my income tax expense equal to.
84000 so why are they giving you this. 50000 they mean the payment who cares they made a payment of 50000. And they debited income tax expense. Okay don t worry about this just know that the total income tax expense is 84000.
Okay because they re asking you for the reported on the whole financial statement okay now in the real world what would happen is this your income. Taxes payable is 84 of which 50000 is already paid so really you don t have 84 thousand really what you have is so if assume when we take the first entry into account. So let me go back and take this first entry into account to tell you how would i solve this so if i kept so let s go back in and account for the 50000. Because it will be helpful for you to understand this.
If you did debited income tax. Expense. 50. Credited cash 50.
In the real world. Which that s what they told us what happened then at the end of the year you debit income tax expense 34000 and you credit income taxes payable 34000 and so what is your total income tax expense well my total income tax expense is 50. Plus 34 which is. 84000 so just be.
Careful it s not 34000. And it s not 50 it s both 50 you already paid in cash and 34 you are going to pay later so your total income tax expense is 84000. That s the answer so now they re not in here. It s all current it ll be more specific.
This is current and this is current. So there is no the third component in this example. This is what i m trying to tell you so the income taxes payable is 84000. Which is all current which is part of the income tax excess make sure you know you re the first text asset.
You re the first tax liability. These this topic is heavily covered on the exam and usually it gives the lot of problems for students. So hopefully you are learning how to deal with it good ” ..
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