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Intermediate Accounting
IFRS Edition
Kieso, Weygandt, Warfield
Fourth Edition

Chapter 19
Accounting for Income Taxes

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Copyright ©2020 John Wiley & Sons, Inc.

Learning Objectives
After studying this chapter, you should be able to:
L O 1 Describe the fundamentals of accounting for income taxes.
L O 2 Identify additional issues in accounting for income taxes.
L O 3 Explain the accounting for loss carryforwards.
L O 4 Describe the presentation of deferred income taxes in financial
statements.
LO 5 Apply the concepts and procedures of interperiod tax allocation.
LO 6 Explain the accounting for loss carrybacks.

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Learning Objective 1
Describe the fundamentals of
accounting for income taxes.

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Accounting for Income Taxes

Corporations must file income tax
returns (tờ khai thuế thu nhập)
following the guidelines developed
by the appropriate tax authority.
Because IFRS and tax regulations
differ in a number of ways,
frequently the amounts reported
for the following will differ:
• Income tax expense (IFRS)
• Income taxes payable (Tax
Authority)

Pretax financial income is a financial reporting term. It also is often referred to as income
before taxes, income for financial reporting purposes, or income for book purposes.
Taxable income (income for tax purposes) is a tax accounting term.
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Accounting for Income Taxes Example

Chelsea, Inc. reported revenues of $130,000 and expenses of $60,000 in each of its first three
years of operations. For tax purposes, Chelsea reported the same expenses to the tax
authority in each of the years. Chelsea reported taxable revenues of $100,000 in 2022,
$150,000 in 2023, and $140,000 in 2024. What is the effect on the accounts of reporting
different amounts of revenue for IFRS vs tax?

For financial reporting, companies use the full accrual method to report revenues. For tax
purposes, they generally use a modified cash basis.

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Comparison of Income Tax Expense to Income

Taxes Payable

ILLUSTRATION 19.4
Income tax expense and income taxes payable differed over the three years but
were equal in total. Are the differences accounted for in the financial statements? Yes
Year Reporting Requirement
2022 Deferred tax liability account increased to $12,000
2023 Deferred tax liability account reduced by $8,000
2024 Deferred tax liability account reduced by $4,000

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Future Taxable Amounts and Deferred Taxes

A temporary difference is the difference between the tax basis of an asset
or liability and its reported (carrying or book) amount in the financial
statements that will result in taxable temporary difference amounts or
deductible temporary difference amounts in future years.
Carrying amt of asset > tax basis Carrying amt of asset < tax basis
Future Taxable Amounts Future Deductible Amounts
Deferred Tax Liability represents Deferred Tax Asset represents the
the increase in taxable income, decrease in taxable income in future
therefore increase taxes payable year, therefore increase in taxes
in future years. refundable (or saved) in future years

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Temporary Difference, Accounts Receivable

Illustration: In Chelsea’s situation, the only difference between the

book basis and tax basis of the assets and liabilities relates to
accounts receivable that arose from revenue recognized for book
purposes. Chelsea reports accounts receivable at $30,000 in the
December 31, 2022, IFRS-basis statement of financial position.
However, the receivables have a zero tax basis.

ILLUSTRATION 19.5

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Reversal of Temporary Difference, Chelsea Inc.

ILLUSTRATION 19.6
Chelsea assumes that it will collect the accounts receivable and report the
$30,000 collection as taxable revenues in future tax returns. A payment of
income tax in both 2023 and 2024 will occur. Chelsea should therefore
record in its books in 2022 the deferred tax consequences of the revenue
and related receivables reflected in the 2022 financial statements. Chelsea
does this by recording a deferred tax liability.

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Deferred Tax Liability

A 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.
Illustration: Recall from the Chelsea example that income taxes payable
is $16,000 ($40,000 x 40%) in 2022. In addition, a temporary difference
exists at year-end because Chelsea reports the revenue and related
accounts receivable differently for book and tax purposes. The book
basis of accounts receivable is $30,000, and the tax basis is zero. Thus,
the total deferred tax liability at the end of 2022 is $12,000.

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Deferred Tax Liability

Schedule of Future Taxable Amounts

Companies may also compute the deferred tax liability by preparing a

schedule that indicates the future taxable amounts due to existing
temporary differences. This is particularly useful when the
computations become more complex.

ILLUSTRATION 19.8

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Deferred Tax Liability

Computation of Income Tax Expense, 2022
Because it is the first year of operations for Chelsea, there is no deferred tax
liability at the beginning of the year. Chelsea computes the income tax expense
for 2022 as follows:

ILLUSTRATION 19.9

This computation indicates that income tax expense has two components—
current tax expense (the amount of income taxes payable for the period) and
deferred tax expense. Deferred tax expense is the increase in the deferred tax
liability balance from the beginning to the end of the accounting period.

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Deferred Tax Liability

Journal Entry for 2022
Chelsea makes the following entry at the end of 2022 to record
income taxes.
Income Tax Expense 28,000
Income Taxes Payable 16,000
Deferred Tax Liability 12,000

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Deferred Tax Liability

Computation of Income Tax Expense, 2023
At the end of 2023 (the second year), the difference between the book basis
and the tax basis of the accounts receivable is $10,000. Chelsea multiplies
this difference by the applicable tax rate to arrive at the deferred tax liability
of $4,000 ($10,000 x .40), which it reports at the end of 2023. Income taxes
payable for 2023 is $36,000.

ILLUSTRATION 19.10

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Deferred Tax Liability

Computation of Income Tax Expense, 2024
At the end of 2024, the difference between the book basis and the tax basis
of the receivable is zero. Income taxes payable for 2024 is $32,000, and the
income tax expense for 2024 is $28,000.
ILLUSTRATION 19.11

The following entry at the end of 2024 to record income taxes.

Income Tax Expense 28,000
Deferred Tax Liability 4,000
Income Taxes Payable 32,000
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Deferred Tax Liability

Deferred Tax Liability Account After Reversals

As indicated, the Deferred Tax Liability account has a zero balance at the end of 2024.

ILLUSTRATION 19.12

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Statement of Financial Position, Deferred Tax Liabilities and

Income Statement Presentation, Income Tax Expense

Income taxes payable is reported as a current liability, and the deferred tax
liability is reported as a non-current liability

ILLUSTRATION 19.13

ILLUSTRATION 19.14

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Components of Income Tax Expense

ILLUSTRATION 19.15

Companies also are required to show the components of income tax expense
either in the income statement or in the notes to the financial statements.

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Future Deductible Amounts and Deferred Taxes

Temporary Differences, Warranty Liability
Illustration: During 2022, Cunningham Inc. estimated its warranty costs
related to the sale of microwave ovens to be $500,000, paid evenly over
the next two years. For book purposes, Cunningham reported warranty
expense and a related estimated liability for warranties of $500,000 in its
financial statements. For tax purposes, the warranty tax deduction is
not allowed until paid. Therefore, Cunningham recognizes no warranty
liability on a tax-basis statement of financial position.

ILLUSTRATION 19.16

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Reversal of Temporary Difference, Cunningham Inc.

ILLUSTRATION 19.17
When Cunningham pays the warranty liability, it reports an expense
(deductible amount) for tax purposes. Because of this temporary
difference, Cunningham should recognize in 2022 the tax benefits for the
taxable deductions that will result from the future settlement of the
liability. Cunningham reports this future tax benefit in the December 31,
2022, statement of financial position as a deferred tax asset.
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Deferred Tax Asset Example

A 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.

Illustration: Hunt Company has revenues of $900,000 for both 2022 and
2023. It also has operating expenses of $400,000 for each of these
years. In addition, Hunt accrues a loss and related liability of $50,000 for
financial reporting purposes because of pending litigation. Hunt cannot
deduct this amount for tax purposes until it pays the liability, expected
in 2020. As a result, a deductible amount will occur in 2023 when Hunt
settles the liability, causing taxable income to be lower than pretax
financial information.

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IFRS and Tax Reporting, Hunt Company

ILLUSTRATION 19.18

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Computation of Deferred Tax Asset, End of 2022

Hunt records a deferred tax asset of $20,000 at the end of 2022 because
it represents taxes that will be saved in future periods as a result of a
deductible temporary difference existing at the end of 2022.

ILLUSTRATION 19.19

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Schedule of Future Deductible Amounts

Hunt can also compute the deferred tax asset by preparing a
schedule that indicates the future deductible amounts due to
deductible temporary differences.

ILLUSTRATION 19.20

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Computation of Income Tax Expense, 2022

Assume that 2022 is Hunt’s first year of operations, and income tax
payable is $200,000, compute income tax expense.

ILLUSTRATION 19.21

The deferred tax benefit results from the increase in the deferred tax asset from
the beginning to the end of the accounting period. he deferred tax benefit is a
negative component of income tax expense.

Income Tax Expense 180,000

Deferred Tax Asset 20,000
Income Taxes Payable 200,000
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Computation of Income Tax Expense, 2023

At the end of 2023 (the second year), the difference between the book
value and the tax basis of the litigation liability is zero. Therefore, there
is no deferred tax asset at this date.

ILLUSTRATION 19.22

Entry at the end of 2023 to record income taxes.

Income Tax Expense 200,000
Deferred Tax Asset 20,000
Income Taxes Payable 180,000

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Statement of Financial Position Presentation, and Income

Statement Presentation
Deferred Tax Asset

ILLUSTRATION 19.23

ILLUSTRATION 19.24
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Deferred Tax Asset

Deferred Tax Asset Account After Reversals

The entry to record income taxes at the end of 2023 reduces the
Deferred Tax Asset by $20,000.

ILLUSTRATION 19.25

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Deferred Tax Asset (Non-Recognition)

Companies recognize a deferred tax asset for all deductible

temporary differences.
However, based on available evidence, company should reduce a
deferred tax asset if it is probable that it will not realize some
portion or all of the deferred tax asset.
“Probable” means a level of likelihood of at least slightly more than
50 percent.

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Deferred Tax Asset (Non-Recognition) Example

Assume that Jensen SA has a deductible temporary difference of

€1,000,000 at the end of its first year of operations. Its tax rate is 40
percent, which means it records a deferred tax asset of €400,000
(€1,000,000 x .40). Assuming €900,000 of income taxes payable,
Jensen records income tax expense, the deferred tax asset, and
income taxes payable as follows.

Income Tax Expense 500,000

Deferred Tax Asset 400,000
Income Taxes Payable 900,000

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Deferred Tax Asset (Non-Recognition) Example

After careful review of all available evidence, Jensen determines

that it is probable that it will not realize €100,000 of this deferred
tax asset. Jensen records this reduction in asset value as follows.

Income Tax Expense 100,000

Deferred Tax Asset 100,000

This journal entry increases income tax expense in the current period
because Jensen does not expect to realize a favorable tax benefit for a
portion of the deductible temporary difference. Jensen simultaneously
recognizes a reduction in the carrying amount of the deferred tax asset.

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Deferred Tax Asset (Non-Recognition) Example

Jensen evaluates the deferred tax asset account at the end of

each accounting period. If, at the end of the next period, it expects
to realize €350,000 of this deferred tax asset, Jensen make the
following entry to adjust this account.

Deferred Tax Asset (€350,000 − €300,000) 50,000

Income Tax Expense 50,000

Jensen should consider all available evidence, both positive and negative, to
determine whether, based on the weight of available evidence, it needs to
adjust the deferred tax asset. For example, if Jensen has been experiencing a
series of loss years, it reasonably assumes that these losses will continue.
Therefore, Jensen will lose the benefit of the future deductible amounts.

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Learning Objective 2
Identify additional issues in accounting
for income taxes.
1. Temporary differences
2. Permanent differences
3. Tax Rate Considerations

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Income Statement Presentation

Formula to Compute Income Tax Expense

ILLUSTRATION 19.27

In the income statement or in the notes to the financial statements,

a company should disclose the significant components of income tax
expense attributable to continuing operations.

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Income Statement Presentation of Income Tax Expense

Given the previous information related to Chelsea Inc., Chelsea
reports its income statement as follows.

ILLUSTRATION 19.28

Income tax expense is often referred to as “Provision for income taxes.”

Using this terminology, the current provision is $16,000, and the provision
for deferred taxes is $12,000

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Specific Differences
• Numerous items create differences between pretax financial
income and taxable income.
• For purposes of accounting recognition, these differences
• are of two types:
• (1) temporary and (2) permanent.

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Specific Differences – Temporary Differences

Examples of Temporary Differences:
• Revenues or gains are taxable after they are recognized in
financial income (deferred tax liability).
• Expenses or losses are deductible before they are recognized in
financial income (deferred tax liability).
• Expenses or losses are deductible after they are recognized in
financial income (deferred tax asset).
• Revenues or gains are taxable before they are recognized in
financial income (deferred tax asset).

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Revenues or gains are taxable after they are recognized

in financial income (deferred tax liability)
An asset (accounts receivable or investment) may be recognized for revenues or
gains that will result in taxable amounts in future years when the asset is
recovered. Eg:
1. Sales accounted for on the accrual basis for financial reporting purposes
and on the installment (cash) basis for tax purposes.
2. Contracts accounted for under the percentage-of-completion method for
financial reporting purposes and the cost-recovery method (zero-profit
method) for tax purposes.
3. Investments accounted for under the equity method for financial reporting
purposes and under the cost method for tax purposes.
4. Gain on involuntary conversion of non-monetary asset which is recognized
for financial reporting purposes but deferred for tax purposes.
5. Unrealized holding gains for financial reporting purposes (including use of
the fair value option) but deferred for tax purposes.

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Expenses or losses are deductible before they are

recognized in financial income (deferred tax liability)
The cost of an asset may have been deducted for tax purposes faster than it was
expensed for financial reporting purposes. Amounts received upon future
recovery of the amount of the asset for financial reporting (through use or sale)
will exceed the remaining tax basis of the asset and thereby result in taxable
amounts in future years. Examples:
1. Depreciable property, depletable resources, and intangibles.
2. Deductible pension funding exceeding expense.
3. Prepaid expenses that are deducted on the tax return in the period paid.
4. Development costs that are deducted on the tax return in the period paid.

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Expenses or losses are deductible after they are

recognized in financial income (deferred tax asset).
A liability (or contra asset) may be recognized for expenses or losses that will
result in deductible amounts in future years when the liability is settled.
Examples:
1. Product warranty liabilities.
2. Estimated liabilities related to discontinued operations or restructurings.
3. Litigation accruals.
4. Bad debt expense recognized using the allowance method for financial
reporting purposes; direct write-off method used for tax purposes.
5. Share-based compensation expense.
6. Unrealized holding losses for financial reporting purposes (including use
of the fair value option), but deferred for tax purposes.

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Revenues or gains are taxable before they are recognized

in financial income (deferred tax asset).
A liability may be recognized for an advance payment for goods or services to
be provided in future years. For tax purposes, the advance payment is
included in taxable income upon the receipt of cash. Future sacrifices to
provide goods or services (or future refunds to those who cancel their orders)
that settle the liability will result in deductible amounts in future years.
Examples:
1. Subscriptions received in advance.
2. Advance rental receipts.
3. Sales and leasebacks for financial reporting purposes (income deferral)
but reported as sales for tax purposes.
4. Prepaid contracts and royalties received in advance.

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Originating and Reversing: Aspects of Temporary Differences

• Originating temporary difference is the initial difference between the
book basis and the tax basis of an asset or liability.
• Reversing difference occurs when eliminating a temporary difference that
originated in prior periods and then removing the related tax effect from
the deferred tax account.
For example, assume that Sharp plc has tax depreciation in excess of book
depreciation of £2,000 in 2020, 2021, and 2022. Further, it has an excess of
book depreciation over tax depreciation of £3,000 in 2023 and 2024 for the
same asset. Assuming a tax rate of 30 percent for all years involved.

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Specific Differences - Permanent Differences

• Some differences between taxable income and pretax financial
income are permanent. Permanent differences result from items
that
o (1) enter into pretax financial income but never into taxable
income, or
o (2) enter into taxable income but never into pretax financial
income.
• Affect only the period in which they occur.
• Do not give rise to future taxable or deductible amounts.
• There are no deferred tax consequences to be recognized.

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Examples of Permanent Differences

Items are recognized for financial reporting purposes but not for tax purposes.
Examples:
1. Interest received on certain types of government obligations.
2. Expenses incurred in obtaining tax-exempt income.
3. Fines and expenses resulting from a violation of law.
4. Charitable donations recognized as expense but sometimes not deductible
for tax purposes.
Items are recognized for tax purposes but not for financial reporting purposes.
Examples:
1. “Percentage depletion” of natural resources in excess of their cost.
2. The deduction for dividends received from other corporations, sometimes
considered tax-exempt.
ILLUSTRATION 19.31

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Tax Rate Considerations

Future Tax Rates

A company must consider presently enacted changes in the tax rate

that become effective for a particular future year(s) when
determining the tax rate to apply to existing temporary differences.
If new rates are not yet enacted for future years, a company
should use the current rate.

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Future Tax Rates

Illustration: Wang Group at the end of 2019 has the following
cumulative temporary difference of ¥300,000, computed as shown.

ILLUSTRATION 19.33

Assume that the ¥300,000 will reverse and result in taxable

amounts in the future, with the enacted tax rates shown.

ILLUSTRATION 19.34

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Future Tax Rates (continued)

Assume that the ¥300,000 will reverse and result in taxable
amounts in the future, with the enacted tax rates shown.

ILLUSTRATION 19.34
The total deferred tax liability at the end of 2019 is ¥108,000.
• Wang may only use tax rates other than the current rate when the
future tax rates have been enacted.
• If new rates are not yet enacted for future years, Wang should use
the current rate.

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Revision of Future Tax Rates

When a change in the tax rate is enacted, companies should
record its effect on the existing deferred income tax accounts
immediately.
A company reports the effect as an adjustment to income tax
expense in the period of the change.

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Revision of Future Tax Rates Example

Assume that on December 10, 2021, a new income tax act is signed into
law that lowers the company tax rate from 40 percent to 35 percent,
effective January 1, 2023. If Hostel Co. has one temporary difference at
the beginning of 2021 related to $3 million of excess tax depreciation,
then it has a Deferred Tax Liability account with a balance of $1,200,000
($3,000,000 × 40%) at January 1, 2021. If taxable amounts related to this
difference are scheduled to occur equally in 2022, 2023, and 2024, the
deferred tax liability at the end of 2021 is $1,100,000.

ILLUSTRATION 19.35

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Revision of Future Tax Rates Example

Journal Entry at the End of 2021

Hostel, therefore, recognizes the decrease of $100,000

($1,200,000 − $1,100,000) at the end of 2021 in the deferred tax
liability as follows.

Deferred Tax Liability 100,000

Income Tax Expense 100,000

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Learning Objective 3
Explain the accounting for loss
carryforwards.

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Accounting for Net Operating Losses

• Every management hopes its company will be profitable. But
hopes and profits may not materialize.
• A net operating loss (NOL) occurs for tax purposes in a year when
taxdeductible expenses exceed taxable revenues.
• An inequitable tax burden would result if companies were taxed
during profitable periods without receiving any tax relief during
periods of net operating losses. Under certain circumstances,
therefore, tax laws permit taxpayers to use the losses of one year
to offset the profits of other years.
• Companies accomplish this income-averaging provision through
the carryforward of net operating losses. Under this provision, a
company pays no income taxes for a year in which it incurs a net
operating loss.

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Loss Carryforward Procedure

Through the use of a loss carryforward, a company may carry the net
operating loss forward to offset future taxable income and reduce taxes
payable in future periods.

ILLUSTRATION 19.36

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Loss Carryback Example

Groh Inc. has no temporary or permanent differences. Groh experiences
a net operating loss of $200,000 in 2022 and takes advantage of the
carryforward provision. In 2022, the company records the tax effect of
the $200,000 loss carryforward as a deferred tax asset of $40,000
($200,000 x 20%), assuming that the enacted future tax rate is 20%. Groh
records the benefit of the carryforward in 2022 as follows.

Deferred Tax Asset 40,000

Income Tax Expense (Loss Carryforward) 40,000

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Recognition of the Benefit of the Loss

Carryforward in the Loss Year
Groh establishes a Deferred Tax Asset account for the benefits of future
tax earnings. The account credited [Income Tax Expense (Loss
Carryforward)] is a contra income tax expense item, which Groh presents
on the 2022 income statement. The $40,000 is the deferred tax benefit
for 2022, which results from an increase in the deferred tax asset.

ILLUSTRATION 19.37

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Computation of Income Taxes Payable with

Realized Loss Carryforward
For 2023, assume that Groh returns to profitable operations and has
taxable income of $250,000 (prior to adjustment for the NOL
carryforward), subject to a 20 percent tax rate. Groh then realizes the
benefits of the carryforward for tax purposes in 2023, which it recognized
for accounting purposes in 2022. Groh computes the income taxes
payable for 2023 as shown.

ILLUSTRATION 19.38

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Computation of Income Taxes Payable with

Realized Loss Carryforward
Journal Entry for 2023

Groh records income taxes in 2023 as follows.

Income Tax Expense 50,000

Deferred Tax Asset 40,000
Income Taxes Payable 10,000

The benefits of the NOL carryforward, realized in 2023, reduce the

Deferred Tax Asset account to zero.

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Presentation of the Benefit of Loss Carryforward

Realized in 2023, Recognized in 2022
The 2023 income statement does not report the tax effects of the
loss carryforward because Groh had reported it previously.

ILLUSTRATION 19.39

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Carryforward (Non-Recognition)
Recognition of Benefit of Loss Carryforward Only
Assume that it is more likely than not that Groh will not realize the entire
N O L carryforward in future years. In this situation, Groh does not
recognize a deferred tax asset for the loss carryforward because it is
probable that it will not realize the carryforward. As a result, there is no
journal entry for 2022 for income taxes by Groh.

ILLUSTRATION 19.40

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Carryforward (Non-Recognition)
Journal Entries in 2023
In 2023, assuming that Groh has taxable income of $250,000 (before
considering the carryforward), subject to a tax rate of 20 percent, it realizes
the deferred tax asset. Groh records the following entries.

Deferred Tax Asset 40,000

Income Tax Expense (Loss Carryforward) 40,000
Income Tax Expense 50,000
Deferred Tax Asset 40,000
Income Taxes Payable 10,000

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Recognition of Benefit of Loss Carryforward When

Realized

Assuming that Groh derives the income for 2023 from continuing
operations, it prepares the income statement as shown.

ILLUSTRATION 19.41

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Non-Recognition Revisited
Possible Sources of Taxable Income
Whether the company will realize a deferred tax asset depends on whether
sufficient taxable income exists or will exist within the carryforward period
available under tax law.
Taxable Income Sources
a. Whether the company has sufficient taxable temporary differences relating
to the same tax authority, which will result in taxable amounts against which
the unused tax losses or unused tax credits can be utilized before they expire;
b. Whether it is probable that the company will have taxable profits before the
unused tax losses or unused tax credits expire;
c. Whether the unused tax losses result from identifiable causes, which are
unlikely to recur; and
d. Whether tax-planning opportunities are available to the company that will
create taxable profit in the period in which the unused tax losses or unused
tax credits can be utilized.
ILLUSTRATION 19.42

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Learning Objective 4
Describe the presentation of deferred
income taxes in financial statements.

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Financial Statement Presentation

Statement of Financial Position

Deferred tax assets and deferred tax liabilities are also separately
recognized and measured but may be offset in the statement of
financial position.
The net deferred tax asset or net deferred tax liability is reported in
the non-current section of the statement of financial position.

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Statement of Financial Position

Classification of Temporary Differences
To illustrate, assume that K. Scott Company has four deferred tax items at
December 31, 2022

ILLUSTRATION 19.43

As indicated, K. Scott has a total deferred tax asset of $54,000 and a total
deferred tax liability of $259,000. Assuming these two items can be offset,
K. Scott reports a deferred tax liability of $205,000 ($259,000 - $54,000) in
the non-current liability section of its SOFP.
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Financial Statement Presentation

Income Statement

Companies allocate income tax expense (or tax benefit) to

• continuing operations,
• discontinued operations,
• other comprehensive income, and
• prior period adjustments.
This approach is referred to as intraperiod tax allocation

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Income Statement
Components of income tax expense (or tax benefit) may include:
1. Current tax expense (benefit).
2. Any adjustments recognized in the period for current tax of
prior periods.
3. Amount of deferred tax expense (benefit) relating to the
origination and reversal of temporary differences.
4. Amount of deferred tax expense (benefit) relating to changes in
tax rates or the imposition of new taxes.
5. Amount of the benefit arising from a previously unrecognized
tax loss, tax credit, or temporary difference of a prior period
that is used to reduce current and deferred tax expense.

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Financial Statement Presentation

Tax Reconciliation
Companies either provide:
• A numerical reconciliation between tax expense (benefit) and
the product of accounting profit multiplied by the applicable
tax rate(s), disclosing also the basis on which the applicable tax
rate(s) is (are) computed; or
• A numerical reconciliation between the average effective tax
rate and the applicable tax rate, disclosing also the basis on
which the applicable tax rate is computed.

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Review of the Asset-Liability Method

Basic Principles of the Asset-Liability Method
The IASB believes that the asset-liability method (sometimes referred to as
the liability approach) is the most consistent method for accounting for
income taxes.
Basic Principles
a. A current tax liability or asset is recognized for the estimated taxes
payable or refundable on the tax return for the current year.
b. A deferred tax liability or asset is recognized for the estimated future tax
effects attributable to temporary differences and carryforwards.
c. The measurement of current and deferred tax liabilities and assets is
based on provisions of the enacted tax law; the effects of future changes
in tax laws or rates are not anticipated.
d. The measurement of deferred tax assets is reduced, if necessary, by the
amount of any tax benefits that, based on available evidence, are not
expected to be realized.

ILLUSTRATION 19.48
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Procedures for Computing and Reporting Deferred

Income Taxes

ILLUSTRATION 19.49

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Exercises for LO1

BE19.1 (LO 1) In 2022, Amirante Corporation had pretax financial
income of $168,000 and taxable income of $120,000. The
difference is due to the use of different depreciation methods for
tax and accounting purposes. The effective tax rate is 40%.
Compute the amount to be reported as income taxes payable at
December 31, 2022.
BE19.2 (LO 1) Oxford SA began operations in 2022 and reported
pretax financial income of €225,000 for the year. Oxford’s tax
depreciation exceeded its book depreciation by €40,000. Oxford’s
tax rate for 2022 and years thereafter is 30%. In its December 31,
2022, statement of financial position, what amount of deferred tax
liability should be reported?

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Exercises for LO1

BE19.5 (LO 1) At December 31, 2022, Suffolk plc had an estimated
warranty liability of £105,000 for accounting purposes and £0 for
tax purposes. (The warranty costs are not deductible until paid.)
The effective tax rate is 40%. Compute the amount Suffolk should
report as a deferred tax asset at December 31, 2022, assuming
sufficient taxable income in future years.
BE19.9 (LO 1) Shetland Inc. had pretax financial income of $154,000
in 2022 in its first year of operations. Included in the computation
of that amount is insurance expense of $4,000, which is not
deductible for tax purposes. In addition, depreciation for tax
purposes exceeds accounting depreciation by $10,000. Prepare
Shetland’s journal entry to record 2022 taxes, assuming a tax rate
of 45%.
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Exercises for LO2

E19.1 (LO 1, 2) (One Temporary Difference, Future Taxable Amounts,
One Rate, No Beginning Deferred Taxes) Starfleet Corporation has one
temporary difference at the end of 2021 that will reverse and cause
taxable amounts of $55,000 in 2022, $60,000 in 2023, and $75,000 in
2024. Starfleet’s pretax financial income for 2021 is $400,000, and the
tax rate is 30% for all years. There are no other deferred taxes at the
beginning of 2021.
Instructions
a. Compute taxable income and income taxes payable for 2021.
b. Prepare the journal entry to record income tax expense, deferred
income taxes, and income taxes payable for 2021.
c. Prepare the income tax expense section of the income statement for
2021, beginning with the line “Income before income taxes.

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Exercises for LO2

E19.3 (LO 1, 2) (One Temporary Difference, Future Taxable Amounts,
One Rate, Beginning Deferred Taxes) Brennan Corporation began 2022
with a $90,000 balance in the Deferred Tax Liability account. At the end
of 2022, the related cumulative temporary difference amounts to
$350,000, and it will reverse evenly over the next 2 years. Pretax
accounting income for 2022 is $525,000, the tax rate for all years is
40%, and taxable income for 2022 is $400,000.
Instructions
a. Compute income taxes payable for 2022.
b. Prepare the journal entry to record income tax expense, deferred
income taxes, and income taxes payable for 2022.
c. Prepare the income tax expense section of the income statement for
2022, beginning with the line “Income before income taxes.”

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Exercises for LO3

BE19.12 (LO 3) Rode Inc. incurred a net operating loss of $500,000 in
2022. The tax rate for all years is 20%. Prepare the journal entries to
record the benefits of the loss carryforward. Rode has evidence that it
is probable that the company will return to profitability in 2023.
BE19.13 (LO 3) Use the information for Rode Inc. given in BE19.12.
Assume that it is not probable that the entire net operating loss
carryforward will be realized in future years. Prepare all the journal
entries necessary at the end of 2022.

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Exercises for LO3

E19.22 (LO 3) (Two NOLs, No Temporary Differences, Entries and Income Statement)
Lanier SA has pretax financial income (or loss) equal to taxable income (or loss) from
2017–2023 as follows.
Pretax financial income (loss) and taxable income (loss) have
been the same for all years since Lanier has been in business. Income
Tax Rate
In recording the benefits of a loss carryforward, assume that (Loss)
it is probable that the related benefits will be realized. 2017 € 48,000 50%
Instructions a. What entry or entries for income taxes should
2018 (150,000) 40%
be recorded for 2018?
b. Indicate what the income tax expense portion of the 2019 90,000 40%
income statement for 2018 should look like. Assume all 2020 30,000 40%
income (loss) relates to continuing operations.
2021 105,000 40%
c. What entry for income taxes should be recorded in 2019?
d. How should the income tax expense section of the income 2022 (60,000) 50%
statement for 2019 appear? 2023 130,000 50%
e. What entry for income taxes should be recorded in 2022?
f. How should the income tax expense section of the income
statement for 2022 appear?

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Exercises
E19.7 (LO 1, 2, 4) (Terminology, Relationships, Computations, Entries)
Instructions Complete the following statements by filling in the blanks.
a. In a period in which a taxable temporary difference reverses, the reversal will
cause taxable income to be _______ (less than, greater than) pretax financial
income.
b. If a $68,000 balance in Deferred Tax Asset was computed by use of a 40% rate,
the underlying cumulative temporary difference amounts to $_______.
c. Deferred taxes ________ (are, are not) recorded to account for permanent
differences.
d. If a taxable temporary difference originates in 2022, it will cause taxable
income for 2022 to be ________ (less than, greater than) pretax financial
income for 2022.
e. If total tax expense is $50,000 and deferred tax expense is $65,000, then the
current portion of the expense computation is referred to as a current tax
_______ (expense, benefit) of $_______.

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Exercises
f. If a company’s tax return shows taxable income of $105,000 for Year 2 and a
tax rate of 40%, how much will appear on the December 31, Year 2, statement
of financial position for “Income taxes payable” if the company has made
estimated tax payments of $36,500 for Year 2? $________.
g. An increase in the Deferred Tax Liability account on the statement of financial
position is recorded by a _______ (debit, credit) to the Income Tax Expense
account.
h. An income statement that reports current tax expense of $82,000 and
deferred tax benefit of $23,000 will report total income tax expense of
$________
i. A reduction in a deferred tax asset is needed whenever it is judged to be
_______ that a portion of a deferred tax asset _______ (will be, will not be)
realized.
j. If the tax return shows total taxes due for the period of $75,000 but the
income statement shows total income tax expense of $55,000, the difference
of $20,000 is referred to as a deferred tax _______ (expense, benefit).

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