intermediate 3

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Author:
bngriffin13
ID:
81937
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intermediate 3
Updated:
2011-05-15 22:06:03
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  1. Permanent Differences
    Never create any deffered tax effects

    • Examples: (not taxable)
    • - interest on Municiple bonds ( not taxable)
    • - Insurance premiums on key employee life insurance (not taxable)
    • - Insurance proceeds on key employee life insurance (not taxable)
    • - Dividend deductions - irs rule, some are not taxable
    • - Fines ( Business Expense, not taxable)


    - Percentage depletion for gas and oil in excess of cost (tax deductible expense, not GAAP) - the cost of the oil field can deplete for more than cost, makes it look attractive for more companies to look for gas and oil
  2. Temporary differences
    • All timing differences
    • will create a deferred tax asset/liability
    • can relate to revenues or expenses
    • also net operating losses which create DTA
  3. Future taxable income > future GAAP pre tax income
    revenue side
    create a deferred tax liability when first occur

    gaap recognition is before tax recognition

    • - installment sales (gaap recognizes sale when earned not when cash is received)
    • -recognize sales tax when collected
    • - precentage of completion (GAAP) vs. Completed contract (tax)
    • - investment income from equity method (GAAP) - significant influence like 1/3 ownership
  4. Future taxable income > future GAAP pre tax income
    Expense side
    create a deffered tax liablitiy when first occur

    tax recognition before GAAP recognition

    • - using MACRS for Tax depreciation and straight line for GAAP
    • - interest capitalization for GAAP - still interest expense for tax
    • - prepaid expense - tax expense when paid
  5. Future taxable income < future GAAP pre tax income
    revenue side
    create a deferred tax asset when first occur

    tax recognition before GAAP

    • - Prepaids recieved
    • - Gains on sale leaseback (sell then lease back)
  6. Future taxable income < future GAAP pre tax income
    expense side
    create a deferred tax asset

    GAAP recognition before Tax

    • - Unrealized losses on trading securities
    • - investment losses from equity method
    • - warranty costs (and all other contingent liabilities)
    • - bad debt expense
    • - pension funding
  7. Classification for deferred taxes as current or noncurrent
    • 1. Identify the asset or liability that is related to the deferred tax
    • - the defferred tax asset/liability is classified by the same classification as the underlying asset/liability - whats causing it
    • 2. If no underlying aset/liability, classify deferred tax by when it reverses/ is used
  8. Deferred tax assets
    are we going to be able to use the asset or not

    if "more likely than not" the asset is not useable (realized), any amount that will not be relized need to go away

    by using a valuation account (B/S - Contra Asset)
  9. Operating Lease
    lessor retains the title, lessee makes lease payments

    does NOT transfer all the risks and benefits of ownership

    • Lessee:
    • d: lease exp xxx
    • c: cash xxx

    • Lessor:
    • d: cash xxx
    • c: lease revenue xxx
    • d: dep exp xxx
    • c: accum dep xxx
  10. Capital Lease
    • Transfer the risks and benefis ofo ownership
    • lessee becomes the owner
    • acts like a financed purchase
    • will have long term liability and asset on balance sheet

    • d: asset xxx
    • c: liability xxx
  11. Capital Lease
    Requirement for Lessee(any one)
    1. the title passes to the lessee

    2. bargain purchase option - an agreement at the enfd of the lease to allow the lessee to buy the asset at a discounted rate (bargain)

    3. lease term is >= 75% of the expectedeconomic life of the asset (exception: doesn't hold if the lease begins in the last 25% of the assets life)

    4. Present Value of the minimum lease payments >= 90% of the assets FMV
  12. Minimum lease payments
    • Excludes:
    • -executory costs (repair, property tax, maintenence, insurance) - period costs

    • includes:
    • - gaurenteed residual values
    • - bargain purchase option
    • - penalty for failure to renew lease
  13. Interest rate on Captial leases
    generally yse lessee's incremental borrowing rate unless the lessee knows interest rate implicit in lease AND IT IS LESS than the lessee incremental rate then use the rate that is in the lease (implicit rate)
  14. Capital Lease
    Requirements for Lessor
    Both have to be met

    • 1. Collectibility of lease payments are reasonably assured
    • 2. additional costs related to the lease are reasonably predicible (estimateable)

    • two types
    • -direct financing lease
    • -sales type lease
  15. Direct Financing
    no profit

    FVM of leased asset = cost of asset to lessor

    • at lease inception
    • d: receivable 50000
    • c: asset 46300
    • c: unearned interst 3700
  16. Sales type lease
    • there is a profit
    • lessor cost is less than the FMV of asset

    • at lease inception
    • d: receivable 50000
    • d: cogs 30000
    • c: inventory 30000
    • c: unearned interest 3700
    • c: sales revenue 46300
  17. Residual Values
    • Amount that can be gaurenteed or ungaurenteed at the end of the lease
    • the title does not pass to the lessee

    Gauranteed - Lessee has obligation at end of lease and Lessor reduces lease payments because the residual value is not recovered by the lease

    Ungauranteed - Lessee has no obligation at the end of the lease and Lessor reduces the lease payments because the residual value is not recovered by the lease
  18. Bargain Purchase Options
    Treat just like Gauranteed residual value for both the lessee and the lessor

    Will need to depreciate over the life of the asset because the title passes
  19. Initial Direct Costs of Lessor
    1. Operating lease - capitalize costs (asset) AND amortize over life of lease

    2. Direct Financing Lease - cefer (capitalize) AND recognize ove life of lease by reducing interest revenue

    3. Sales Type Lease - Expense at the begining of the lease
  20. Statement of Cash flows
    • Reconcile cash and cash equivalents
    • Change in cash from the begining of the year to the end of the year
    • inflows and outflows of cash

    • Operating
    • Investing
    • Financing
  21. Operating
    Two alternative presentations - direct and indirect, fasb uses direct and the most common is the indirect

    if you use the direct method - you must include a reconcilliation of net income to the cash from operating activities (Indirect)

    • Net income
    • adjust for noncash expenses/revenues, gains/losses
    • +- changes in current assets
    • +- changes in current liabilities
    • = cash flow from operating activities
  22. Investing
    Changes in investments, changes in PP+E, changes in intangibles
  23. Financing
    Changes in long term liabilities and equity
  24. Indirect Method - Operating Activities
    • Net Income
    • + depreciation Expense
    • + losses on Sale
    • - gains on sale
    • + Amortization Expense
    • + Amortization of Bond Discount
    • - Amortiztion of Bond Premium
    • + Unrealized loss on Trading securities
    • - Unrealized gain on Trading Securities
    • + Compensation Expense from issuing stock options
    • + net losses from investments accounted for under equity method
    • - Net gains from investements accoutnted for under equity method

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