[jeff]

Welcome to the Q2 2016 CPA Exam Study Group for FAR.

Some BLITZ videos to help your exams: https://www.another71.com/ninja-blitz

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[Operation_CPA]

@Incoming91

This is a really simple example, but once you understand what is happening mechanically, it will click.

Example:

X company has 500,000 pretax income (this is your book, but it needs to be adjusted). The following are the differences:

Depreciation 20,000 (adjust temporary differences to tax after adjusting book for permanent differences)
Life insurance premium 50,000 (adjust permanent differences to book ONLY)

The tax rate is 30%

…Tax………..Temp differences…….Book
450,000………….(20,000)………….500,000
(20,000)………………………………..(50,000)
= 430,000…………………………..= 450,000

430,000 * .30 = 129,000 (Income tax payable)
450,000 *.30 = 135,000 (Income tax EXP)
Temp differences go in middle – 20,000 *.30 = 6,000

Now use the journal entry:

DR: Income tax expense – current 129,000 (135,000-6000)
DR: Income tax expense – deferred 6,000
CR:……………………………………Income tax payable 129,000
CR:…………………………………… DTL…………………….6000

When Tax < Book = DTL
when Tax > Book = DTA

DTA Entry: (With Becker most of the problems deal with DTL it seems)

DR: Income Tax exp
DR: DTA
CR:……Income tax payable
CR:……Income tax benefit

Someone correct me if I am wrong. Hope this helps!

[Just3Letters]

Incoming91,

Also, if you can't figure out if the answer is a DTA or DTL… this is the simple-minded trick I use:

If you have higher taxable income NOW… You have lower taxable income LATER. DTA.

If you have lower taxable income NOW…You have higher taxable income LATER. DTL.

Depreciation is higher for financial than tax in year 1? Well then you must have higher depreciation for tax after year 1! Higher depreciation=lower taxable income=DTA

FAR- 81
REG- 81
BEC- Aug 22, 2016
AUD- TBD

[marqzho]

🙂 remember this formula. All you have to do is plug the $ in :

Book income
+/- Permanent Difference
= Book Taxable
+Temp Difference <– If temp diff. is a plus, it is a DTA
– Temp Difference <– If temp diff. is a minus, it is a DTL
= Taxable Income <– $ on the tax return
* Current tax rate%
= Current tax liability
– prepayment
= Tax payable

Let say you have book income of $100, including in book income there is a muni bond income for $20. And you have a pre-paid rent income for $30, current tax rate is 20% and future enacted rate is 30%

Put info in the formula
$100 (Book income)
-$20 (perm. diff.)
=$80 (Book taxable)
+$30 (Prepaid rent – need to pay tax when received. $110 should be on tax return, so this is a PLUS. And since this is a plus, this is a DTA)
=$110 (taxable income)
*20%
22 ( Current tax liability)

J/E
Dr. Income tax expense 13 (PLUG)
Dr. DTA 9 ($30*30%)
Cr. Current tax liability 22 (cal. above)

Next year, you earn that $30 rent. No other income.
J/E
Dr. Income tax expense 9 (This is always a PLUG)
Cr. DTA 9 (No more temp diff. So DTA target is 0, we need to reverse out the asset)
Cr. Current tax liability 0 (since no income at all)

If you look at two years together, we paid actual tax$ for $22 and we end up have $22 expense in the income statement, so we balance 🙂

REG 90
FAR 95
AUD 98
BEC 84

[Incoming91]

@ Operation_CPA & Just3Letters

Thank you both for the help!

REG: 80
FAR: 78 (x2)
AUD: 6/10
BEC: 7/20

[Incoming91]

@ marqzho

Thanks for that formula.

REG: 80
FAR: 78 (x2)
AUD: 6/10
BEC: 7/20

[Claudia408]

For Stmt of CF recon, I know you are supposed to add back non cash items like depreciation and amortization, but this questions subtracts it. What am I missing?

Flax Corp. uses the direct method to prepare its statement of cash flows. Flax's trial balances at December 31, 20X1 and 20X0, are as follows:

Selling expenses $141,500
X1 X2
Allowance for uncollectible accounts $1,300 $1,100
Accumulated depreciation $16,500 $15,000

Flax purchased $5,000 in equipment during 20X1.
Flax allocated one-third of its depreciation expense to selling expenses and the remainder to general and administrative expenses.

What amounts should Flax report in its statement of cash flows for the year ended December 31, 20X1, for cash paid for income taxes?

Answer: Flax reported selling expenses of $141,500. There was an increase in the allowance for doubtful accounts of $200, indicating $200 in bad debt expense, which would ordinarily be reported as a selling, expense but does not require cash. In addition, there is an increase in accumulated depreciation of $1,500 indicating depreciation expense of $1,500, 1/3 of which, or $500, is allocated to selling expenses, another noncash expense. As a result, selling expenses requiring cash would $141,500 – $200 – $500 or $140,800.

BEC - 75 (3x)
AUD - 78 (3x)
REG - 67, 66, Aug 1
FAR - 54, Sept 8

[Just3Letters]

More deferred tax questions. I thought I understood them until the 7 Sims I just did 🙁

1. Cost of one-year warranties are estimated and accrued for financial reporting purposes.
– My thought was this is just an accrual. Cash is actually going to change hands in the future which is when it is taxable. Therefore, if it is taxable in the future. DTL? But apparently it was a DTA. How?

2. A company elects to prepay a liability for a one-year period that overlaps B/S date.
– My thought was that cash is changing hands now. So you tax it now. If you tax more now, you have an asset later (less tax later). It is actually a DTL. How?

3. Just a general question, when there is a permanent difference. Does that difference always result in “no financial statement presentation”?

FAR- 81
REG- 81
BEC- Aug 22, 2016
AUD- TBD

[Spartans92]

Just took the longest NAP! I probably should not have.. Woke up early and studied for 3 hours and passed out. @Marqzho, Thanks that helps the question did say the dividends earned were going towards the operations. That explains it.

BEC- PASS

[Operation_CPA]

My exam is in 6 days and I just finished my second time through Becker (with the exception of chapter 10, which I just made key flashcards for). I want to spend the last few days doing strictly NINJA MCQ, progress tests, and practicing SIMS // JE's.

For journal entries, what would you say are the MUST know journal entries?

Gov.
Pensions (DTL vs. DTA)
Treasury method vs. Par value method
Bonds & leases
Like Kind exchanges (those that lack commercial substance)
Small stock dividend vs. large stock dividend
Consolidations (CAR IN BIG)

Thoughts?

[Spartans92]

Cost V Equity? NFP? I guess those are part of Gov… and Consolidations.

BEC- PASS

[Operation_CPA]

@Spartans92

Good call, added to my list! If anyone has anything else feel free to add.

[marqzho]

Just3Letters
if you refer the formula i posted in previous page,

“Cost of one-year warranties are estimated and accrued for financial reporting purposes”
Let say book income is $100, $20 is estimated warranty expense

plug the $ in the formula:

book taxable $100
+/-Temp difference ???? (positive is DTA, negative is DTL)
=Taxable income $120

Temp difference is a plug 20. Therefore it is a DTA

“Therefore, if it is taxable in the future. DTL? But apparently it was a DTA”

It is a tax deductible expense in the future, not taxable income. You need to think it the other way around 🙂

REG 90
FAR 95
AUD 98
BEC 84

[Incoming91]

For the question below, what do they exactly mean in the third line when they say the have “cumulative taxable difference of 70k”?

Quinn Co. reported a net deferred tax asset of $9,000 in its December 31, Year 1, balance sheet. For Year 2, Quinn reported pretax financial statement income of $300,000. Temporary differences of $100,000 resulted in taxable income of $200,000 for Year 2. At December 31, Year 2, Quinn had cumulative taxable differences of $70,000. Quinn's effective income tax rate is 30%. In its December 31, Year 2, income statement, what should Quinn report as deferred income tax expense?

REG: 80
FAR: 78 (x2)
AUD: 6/10
BEC: 7/20

[marqzho]

cumulative taxable difference = Year 1 taxable difference + Year 2 taxable difference + ….Year N taxable difference 🙂

REG 90
FAR 95
AUD 98
BEC 84

[Incoming91]

@ marqzho

so how does that effect the formula you provided earlier?

Thanks

REG: 80
FAR: 78 (x2)
AUD: 6/10
BEC: 7/20

[Author]

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