Income Tax Analysis - Case Study Example

Income Tax Analysis Assignment Student’s Name Institutional Affiliation Income Tax Analysis It is the responsibility of every company to come up with tax return filings in comparison to different standards and regulations especially the IRS as well as taxes paid in relation to the stipulations put forth within the Income Tax Expense, which is basically related to the Generally Applied Accounting Principles. It is important to ascertain the fact that organizations are engaged in the exercise of paying different forms of taxes within a certain operational year. Following this line of argument, organizations are expected to comprehend these different forms of accounting for income taxes in order to align their respective operations with the underlying regulations. Amongst the well-known items related to accounting for recording income taxes involve the income tax payable, income tax expenses, deferred income and liability txes s well as deferred tax assets. Income tax payable is mainly composed of current liabilities of a given firm that should be paid to the government within the end of certain operational periods, which in most cases is made up of full years. On the contrast, income tax expense refers to the underlying level of cash resources that is disclosed by entities in their respective accounting operational periods for government taxes that are deemed to be regarded to a certain taxable profit posted. Recently, intensive efforts have been made up in regards to evaluating the manner for which companies engage in the payment of taxes and, also whether they make sure to pay the right amounts of taxes within any given reporting period. It is notably clear to indicate that taxes are an imminent costs that companies should go ahead and manage effectively just like any other form of costs. Such accounting items as the deferred tax liability represent the overall increase in the level of payable taxes in a near future that arises when there are temporary differences in the amounts of taxes that is supposed to be paid at the end of an underlying period. Subsequently, the deferred tax assets is the amount that represents an overall increase in the level of refundable taxes in a near future that arises due to deductible temporary differences existing within a given operational period. Deferred income tax is deemed to be a significant form of liability that should be posted within the end-year statement of financial position that emanates from the level of income that has been posted already for a given accounting period but that which is never taxable at all. Case Example To fully comprehend the analysis above, it is fair that the discussion provide a real life scenario that tries to examine and elaborate on the items mentioned. The case scenario seeks to establish the amount of taxes a company known as: Smithian Co. is expected to pay out to the government and determine the possibility of differences that might arise as a result of this activity. Smithian Co Analysis The company operates under the manufacturing industry and just like any other public company; it has presented and disclosed its financial statements accordingly. The firm has reported pre-taxed financial revenue of $300,000 for the period between December 2013 and June 2014. The below accounting items have resulted to the taxable income to be significantly different to the already posted pretax financial income; The amount of rental income which was received is deemed to be greater in comparison to the rent stated within the income statement by $50,000 The value related to depreciation on the impeding taxes is higher in comparison to the depreciation item presented within the income statement by $60,000 The company’s fines for activities of pollution have been recognized as an expense of $20,000 within the income statement. The current tax rate for the company is stated at 30% for all of its operational periods and it is expected that the company will continue to report on its taxable income amounts for all future periods. Notwithstanding, current there are no amounts relating to deferred taxed at the beginning of 2014. Using this scenario answer the questions below; i) Calculate both the taxable income and income taxes that is payable for the period ending 2014 Solution: Taxable Income For Smithian Co Items: $ Pre tax financial income for 2014 300,000 Surplus of depreciation tax returns (60,000) Unearned Rent 50,000 Non-deductible Fine 20,000 Taxable Income 310,000 Note: the surplus of depreciation is negative because it is deductible after a period of time. Computation of Income Tax Payable For Smithian Co For this section, both the taxable income calculated as above and the tax rate of 30% is used. Accounting Item: $ Taxable Income 310,000 Tax rate 30% Taxable income 93,000 ii) Prepare the necessary journal entries to record the above calculated income tax expense, the deferred income taxed as well as the income taxes payable for 2014 Recording Income Tax Expense Temporary Difference Future Taxable Deductible Amount Tax Rate Deferred Tax Assets Liabilities Depreciation $ 60,000 30% $ 18,000 Unearned Rent $ (50,000) 30% $ (15,000) Total $ (10,000) $ (15,000) $ 18,000 Calculation of Deferred Income Tax Deferred Tax Liability (End of Y2014) $ 18,000 Deferred Tax Liability (Beginning of Y2014) $ 0 Deferred Tax Expense for Y2014 $ 18,000 Deferred Tax Assets (End of Y-2014) $ (15,000) Deferred Tax Assets (Beginning of Y-2014) $ 0 Deferred Tax Benefit for Y2014 $ (15,000) Deferred Tax Benefit for Y2014 = $ (15,000) Deferred Tax Expense for Y2014 = $ 18,000 Net Deferred Tax Benefit for Y2013 = $ (3,000) Calculation of Income Tax Payable: Given that we have already calculated the income tax payable in part (i) of the assignment, then in this section we will just lift it as below; Net Deferred Tax Benefit for 2014 $ (3,000) Current Tax Expense for 2014 $ 93,000 Income Tax Expense for 2014 $ 90,000 The next phase tackles the posting of these calculations into their respective journal entries while still ensuring to conform to the double-entry technique as below; Dr. Cr. Income Tax Expense $ 90,000 Deferred Tax Assets $ 18,000 Deferred Tax Liabilities $ 15,000 Income Tax Payables $ 93,000 iii) Prepare the income tax expense for the year that ended 104 while making sure to begin with the line; “ Income before taxes” Income before Income Taxes $ 300,000 Income Tax Expense: Current $ 93,000 Deferred $ (3,000) $ (90,000) Net Income $ 130,000 iv) Calculate the effective tax rate for the year ended 2014 It is important to note that the effective tax rate can also be known as the total income tax expense and from the scenario it can be calculated as follows; Effective Tax Rate= 90,000/300,000= 0.3*100%, 30% From the calculation, it can be noted that Smithian Co. paid the exact minimum tax rate required by the government of 30%; nothing more nothing less as expected. US GAAP versus IFRS There has been a requirement for all public companies regardless of its operations and regional market adopts the IFRSs over the US GAAP, which is more centered mostly within the United States of America. The two accounting standards differ greatly in their applications given that IFRS is mostly principle-based as opposed to US GAAP, which is rule-based prompting the adoption of the former viable since it facilitates easier comparison of activities. Below is a discussion of the notable differences between the two standards. Accounting Items US GAAP IFRS A list of documentation that is needed for presentation of a company’s financial statements Income statement, changes in financial position, changes in equity, statement of comprehensive income, cash flow statement as footnotes Only there items that include; income statement, statement of financial position and the statement in changes in equity. Inventory reversal Under this standard regulation, the exercise is entirely prohibited Under this standard, it is permitted but under specific circumstances. Asset’s definition Asset is defined as an item that might led to future probable economic benefit Under this stipulation, asset is deemed to be a fundamental resource from which there will be a flow of future economic benefit to an entity. Income statements extraordinary items criterion Prohibited to those accounting items that are deemed to be infrequent and unusual It is entirely prohibited at all cost. Asset revaluation process The entire process of revaluation is not permitted at all The process of revaluation of assets is deemed to be a permitted accounting framework thus requiring revaluation to fair value on a distinctive regular basis. Income taxes basis It is reflected as a query of a given facet under the tax law in the US. In fact, for most cases of assets and liabilities there are no form of disputes on the amount however, in the case of uncertainty, the amount is established in relation to the ASC-740-10-25 Under this framework, income tax basis is deemed to be amount that is deductible or even taxable for tax reasons. The basis is only affected by the manner in which the management sets out to pay out the taxed within a given period of time. The Recognition of deferred tax assets Under this framework, it is recognized to the fullest extent except for certain scenarios that shows basis differences The amounts, under IFRS, are recognized only to the extent that it is deemed to be probable that they will be realized in the near future. References https://www.pwc.com/us/en/issues/ifrs-reporting/publications/assets/ifrs-and-us-gaap-similarities-and-differences-2014.pdf http://www.ey.com/Publication/vwLUAssets/IFRSBasics_BB2435_November2012/$FILE/IFRSBasics_BB2435_November2012.pdf https://www.pwc.com/gx/en/paying-taxes/pdf/pwc-corporate-income-tax-report.pdf http://www.investopedia.com/terms/i/incometaxpayable.asp Read More