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									Chapter 13: Corporate Income Statement/Stockholders’ Equity

Deferred Income Taxes: The discrepancy between GAAP-based tax expense and Internal
Revenue Code-based tax liability.
The journal entry for Income Taxes includes:
   1) Income tax expense per the Income Statement (GAAP)
   2) Income tax payable represent what will be actually paid to the IRS (Tax code)
   3) The difference
Differences are caused by timing, e.g.,
    The methodology for recognizing depreciation expense can be straight-line or declining
    balance for GAAP, but MACRs for the IRS (modified accelerated cost recovery method).
    Ultimately the asset will be fully depreciated, even if it is depreciated at a faster rate for tax
    purposes. Hence, it’s a timing issue.
2 possible scenarios could occur: 1)the company pays less to the IRS or 2)more to the IRS, (than
reported for accounting purposes).
                              2001                         2002
Income Tax Expense:           $200,000                     $200,000
For Income tax purposes, a $25,000 deduction is allowed in 2001, that will not be deducted for
accounting purposes until 2002. Prepare the journal entry to record estimated current and
deferred income taxes for 2001 and 2002. Assume a 30% marginal tax rate.
Situation              Journal Entry                             Reporting:
Company pays less
taxes to the IRS than Income tax expense _______                 Deferred income tax has
they report on           Income tax payable         _______ a credit balance of
Financial Statements     Deferred income tax        _______ ________ and will be
                                                                 reported as a Liability

Company pays more
taxes to the IRS than              Income tax expense _______         Deferred income tax
they report on                     Deferred income tax_______         has a debit balance of
Financial Statements                 Income tax payable     _______   _________ and will be
                                                                      reported as an Asset

Short term or Long term? Deferred Income Tax will be reported as short term when the timing
difference is within 1 year (or operating cycle).
Each year, a company reviews the Account Balance in the Deferred Income Tax Account to
verify that it represents the expected asset or liability. If the tax laws have changed, an adjusting
entry will be made, offset against Gain (or Loss) from Reduction (or Increase) in Income Tax

Question: How do you calculate Income Taxes actually paid? Look at the Income Statement
and Balance Sheet:
       Income Tax Expense + Deferred Income taxes (if debit balance) or
       Income Tax Expense – Deferred Income Taxes (if credit balance).


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