[jorden_rowrow]

Becker Question –

Zeff Co. prepared the following reconciliation of its pretax financial statement income to taxable income for the year ended December 31, Year 1, its first year of operations:
Pretax financial income $ 160,000
Nontaxable interest received on municipal securities (5,000)
Long-term loss accrual in excess of deductible amount 10,000
Depreciation in excess of financial statement amount (25,000)
Taxable income $ 140,000
Zeff’s tax rate for Year 1 is 40%.
In its Year 1 income statement, what amount should Zeff report as income tax expense-current portion?

In the book we’ve had to add or subtract from the financial statement income position, how come this time we have to adjust the taxable income. The only way i learned was to adjust depreciation to taxable income

 

 

[jorden_rowrow]

why isn't the income for tax purposes 155,000 and why isn't the income for the financial statement income 155,000. Btw i know that's not how you do the answer, i went one step further and tried to understand a different aspect of this problem

[Anonymous]

Jorden, it's usually helpful for people to answer if you post what the answer was and/or the explanation so that we can help understand what the answer is supposed to be, as well as what you thought it was, and then explain how to get from Point A to Point B.

However, this would be my reconciliation of book income to taxable income:

Pre-tax financial income: $160,000
Less nontaxable interest income: -5,000 (since it's non-taxable, it's not part of taxable income)
Plus long-term loss in excess of deductible amount: +10,000 (since it's beyond what can be deducted, it won't be counted into taxable income)
Less depreciation in excess of financial statement amount: -25,000 (since it's more than the financial statements reflected)
—————————————————————————————————–
Equals Taxable Income: $140,000

Altogether, that's $160,000 – 5,000 + 10,000 – 25,000 = $140,000

I'm not sure how you were getting your $155,000, so not sure which pieces of that you were treating differently, but hopefully that helps make sense why each of those are treated the way they are.

Then the final financial statement income would be $160,000 (given pre-tax income) minus taxes, which would be just the current portion of income taxes, not simply 40% x 140,000. My tax calculations are a little rough, but I think the current tax cost calculation would be $155,000 x 40% (is that what you were saying with the $155,000?), based on the pre-tax financial income reduced by the non-taxable income. The depreciation and loss will affect tax assets and liabilities, but doesn't affect financial tax cost, IIRC.

[jorden_rowrow]

sorry i thought that, since my question wasn't about the answer specifically but more geared towards the info they gave that I didn't have to give it (but next time I will). I have a question regarding your answer that you gave. Throughout the first half of this chapter in becker i've learned that you've needed to adjust municipal interest to the income statement to get income thus how i got 155,000 as income. I did:

160,000 (pretax financial statement income)-5,000 municipal interest= 155,000 income for the financial statement section and
140,000 (taxable Income) +25,000 (depreciation)- 10,000 (loss)= 155,000.

I guess my question is that why don't you do anything with the permanent difference to the financial statement because doesn't financials include permanent differences.

[Anonymous]

160,000 (pretax financial statement income)-5,000 municipal interest= 155,000 income for the financial statement section

^ That's how you get the income to use for the current-year tax cost calculation

140,000 (taxable Income) +25,000 (depreciation)- 10,000 (loss)= 155,000
^ I'm not sure what you're using that calculation for, though. 😐

However….it's been 3 years since I've studied this stuff, and I didn't use Becker, so this could be for a worksheet/teaching tool that Becker uses or that's standard practice now that I'm just not familiar with. I don't think it's part of something you'd see on the exam, but I could have just forgotten it too. 😐 Or maybe they're just trying to show you both ways of calculating it – that you can start from taxable income or start from pre-tax and get there both ways?

[jorden_rowrow]

basically what becker thought us was to separate this out into a tax return box and an income statement (personal financial statement income) box. In the tax return box they have the income and in examples they tax out temporary differences such as depreciation to get your taxable income. For the financial statement box they have income and then they take out permanent differences such as municipal interest and penalty. So when I say 155,000 for financial statement it is because i've been tought to add back the interest and any permanent difference. That's why when I saw that the problem did nothing with financial income, I got confused. Can you explain it again to me?

[rybread7293]

@jorden_rowrow I'm confused as to what exactly you are asking, but I will give it a shot to hopefully explain it.

In this question it is asking for the income tax expense – CURRENT portion which means it is the taxable income multiplied by the tax rate simple as that. Since the taxable income is given to you as $140,000 (which checks out when you add/remove any permanent or temporary differences), that is multiplied by 40% to get what I assume is the answer of $56,000 for Income Tax Expense – Current Portion.

As Becker taught, you cannot simply take the pretax financial income and multiply it by the tax rate to get the total income tax expense. You must separate it between the current and deferred portions and them sum it in order to get the total income tax expense reported. Since the municipal interest is considered a permanent difference, this is not included in the deferred tax expense/liability calculation (unlike the others which I believe are both temporary differences).

So you'd have current portion of $140,000 x 40% and then a deferred portion of $15,000 x 40% and those summed would leave you with the total income tax expense for the year. The permanent difference of $5,000 is seemingly a distractor in this case because they've already given you the taxable income amount.

Keep on keepin' on.

FAR (4/21/16) - 91
AUD (5/23/16) - 97
REG - 7/26/16
BEC - 8/24/16

[jorden_rowrow]

thanks for your response, but I am not asking about the answer, just about a general topic. I'll make it simple, aren't permanent differences related to financial statement income and not taxable income?

[jorden_rowrow]

if you don't get it, i have a problem that will explain it

[rybread7293]

Ah gotcha. Permanent differences do relate to taxable income, but do NOT relate to deferred taxes. You must subtract out (or add) permanent differences from financial income in order to arrive at taxable income, which is the income used to calculate the current portion of interest expense. However, when doing deferred taxes, permanent differences are thrown aside and forgotten. Then your pretax financial income minus the TOTAL income tax expense (current portion + deferred portion) will be the net income after taxes shown on the official financials. Hopefully this makes sense or answers your question in some way?

Keep on keepin' on.

FAR (4/21/16) - 91
AUD (5/23/16) - 97
REG - 7/26/16
BEC - 8/24/16

[Anonymous]

adming close this thread please. same question asked here by OP

https://www.another71.com/cpa-exam-forum/topic/i-wanted-to-open-this-up-to-others

got 10 responses each.

[Author]

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