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Nadia Enterprise - Comparison between US GAAP and IFRS - Case Study Example

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The paper 'Nadia Enterprise - Comparison between US GAAP and IFRS" is a good example of a finance and accounting case study. Nadia enterprise reports pretax financial income of $80,000 for 2012. The following items cause taxable income to be different than pretax financial income. Depreciation on the tax return is greater than depreciation on the income statement by $16,000…
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INCOME TAX Name: Tutor: Subject: Date: Nadia enterprise reports pretax financial income of $80,000 for 2012. The following items cause taxable income to be different than pretax financial income. 1. Depreciation on the tax return is greater than depreciation on the income statement by $16,000 2. Rent collected from tax return is greater than the rent earned on income statement by $27,000 3. Fines for pollution appear as an expense of $11,000 on the Income Statement Nadia’s tax rate 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of the year 2012. Instructions: a. Compute taxable income and income taxes payable for 2012 b. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2012 c. Prepare the income tax expense section of the income statement for 2012, beginning with the line “Income before income taxes” d. Compute the effective income tax rate for 2012 Solution PART (A-i) Calculation of Taxable Income (TI) Here we will calculate first of all the Taxable Income and Income Tax Payable for Nadia’s Company for Year 2012. Following is the figure we have Pretax Financial Income for 2012 = $ 80,000 Excess of Depreciation Tax Return = $ (16,000)* Unearned Rent collected over the rent that is earned = $ 27,000 Permanent Difference (Non-deductible Fine) = $ 11,000 Taxable Income = $ 102,000 *In the above calculation, we have put the depreciation negative because it is deducted after sometime. PART (A-ii) Calculation of Income Tax Payable (ITP) In this part we will take into account the Tax Rate and the Taxable Income which we have calculated in the part A-i. Taxable Income = $ 102,000 Tax Rate = 30% Income Tax Payable = $ 30,600 Thus, the Taxable Income for Nadia’s Company is $ 102,000 and the company has to pay Income Tax of amount $ 30,600. PART (B-i) Recording Income Tax Expense (ITE) In this part first of all we will record the income tax expense and for that we will make a table Temporary Difference Future Taxable Deductible Amount Tax Rate Deferred Tax Assets Liabilities Depreciation $ 16,000 30% $ 4,800 Unearned Rent $ (27,000) 30% $ (8,100) Total $ (9,000) $ 8,100 $ 4,800 PART (B-ii) Calculation of Deferred Income Tax (DIT) Here, we will calculate the deferred tax for liabilities and assets both at the end of the Year 2012 and the beginning of 2012. Deferred Tax Liability at the End of Y2012 = $ 4,800 Deferred Tax Liability at the Beginning of Y2012 = $ 0 Deferred Tax Expense for Y2012 = $ 4,800 Deferred Tax Assets at the End of Y2012 = $ (8,100) Deferred Tax Assets at the Beginning of Y2012 = $ 0 Deferred Tax Benefit for Y2012 = $ (8,100) Deferred Tax Benefit for Y2012 = $ (8,100) Deferred Tax Expense for Y2012 = $ 4,800 Net Deferred Tax Benefit for Y2012 = $ (3,300) PART (B-iii) Calculation of Income Tax Payable (ITP) Since we have already calculated the Income Tax Payable in the Part A-I so will take the figure and put it here. Net Deferred Tax Benefit for Y2012 = $ (3,300) Current Tax Expense for 2012 = $ 30,600 Income Tax Expense for Y2012 = $ 27,300 Now in the next part, we will finally for the Journal Entry for all the calculation and have to fulfill the condition of Debit must be equal to Credit. Income Tax Expense = $ 27,300 Deferred Tax Assets = $ 8,100 Deferred Tax Liabilities = $ 19,200 Income Tax Payables = $ 30,600 Thus in this case also the debit and the credit for Nadia’s Company are equal i.e. $ 49,800. PART (C) Prepare Income Tax Expense (ITP) Here we will look into the Income before Income Tax and thus calculate the Income tax expense for both current and deferred one and finally with the calculation of the Net Income. Income before Income Taxes = $ 80,000 Income Tax Expense: Current = $ 30,600 Deferred = $ (3,300) $ (27,300) Net Income = $ 52,700 PART (D) Calculation of Effective Tax Rate (ETR) In the last part, I will calculate the Effective Tax Rate that can be defined as the Total Income Tax Expense / Pre Tax Financial Income. Thus, Total Income Tax Expense/Pretax Financial Income = $ 27,300/$ 80,000 = 34.125% Thus, it’s obvious from the above calculations that the minimum rate required by the Government was 30% but the actual Income Tax paid by the Nadia’s Company is around 34% which is higher than the demanded one. Comparison between US GAAP and IFRS Many companies are making transition from US Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards. These two are different from each other and it is important to identify these differences. IFRS consolidation principles are different from those of US GAAP in some respects and the difference can cause those companies which adopted to deconsolidate or consolidate entities which are not stated in the GAAP. For this reason, the unconsolidated financial statements should be treated the same way as first time adopters. The companies which make the transition to IFRS should bridge data gaps created by investees in order to comply with the standards of IFRS. For revenue standards, IFRS allows for early adoption while GAAP precludes it. IFRS has two revenue standards which do not require rules and four other revenue-focused interpretations. These four categories includes: making of contracts, sales of goods, rendering services and other use of assets to generate profit, interests etc. The criterion which is applied on the four categories is probability of how they will generate benefits to the entity. The US GAAP follows rules which are outlined by ASC and FASB. For taxes, both US GAAP and IFRS records their deferred taxes initially based on profit or loss. In IFRS, any variation to the deferred tax should be identified under profit or loss apart from the extent in which it relates to the items recognized outside profit or loss. For US GAAP, any changes in the tax such as change in tax rate or change in the tax laws must be recorded through profit or loss even if the changes originated from an outside source. Tax effects of shared-based payment arrangement also differ significantly for US GAAP and IFRS entities. For example, calculation of ratios such as current is affected by IFRS because it treats all ratios as noncurrent ratios. Deferred taxes from assets and liabilities from foreign investment are not recognized by US GAAP while in IFRS they are recognized. References Barth, M. E., Landsman, W. R., Lang, M., & Williams, C. (2012). Are IFRS-based and US GAAP-based accounting amounts comparable?. Journal of Accounting and Economics, 54(1), 68-93. Edgerton, J. (2012). Investment, accounting, and the salience of the corporate income tax (No. w18472). National Bureau of Economic Research. Harris, P., Stahlin, W., Arnold, L. W., & Kinkela, K. (2013, January). A COMPREHENSIVE CASE STUDY: US GAAP CONVERSION TO IFRS. InGlobal Conference on Business & Finance Proceedings (Vol. 8, No. 1, p. 121). Institute for Business & Finance Research. IFRSS and US GAAP: Similarities and Difference (2014). Retrieved from: https://www.pwc.com/.../ifrs.../ifrs-and-us-gaap-sim... Stahlin, W., Harris, P., Arnold, L. W., & Kinkela, K. (2013). A Comprehensive Case Study: US GAAP Conversion to IFRS. Howe School Research Paper, (2013-1). Read More
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