[jorden_rowrow]

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%.

I think my question is geared towards a different part of this problem. my question revolves around the fact that 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. 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.

[hasy]

I remember this question, it's asking for the current tax liability. For the purposes of THIS question, they excluded the 5,000 but it should not be in the calculation of TAXABLE income. While on these hypotheical financial statements, they probably still retain that $160,000 income as pre-tax. What MAY be shown on the financial statements may not be included in the tax return.

AUD - 83
BEC - 80
FAR - 83
REG - 78

BEC - 80 (Roger + NINJA MCQ + WTB)

FAR - 72; 83 (Roger + NINJA MCQ)

AUD - 83 (Roger + NINJA MCQ + WTB)

REG - 52; 78 (Roger + NINJA MCQ)

Ethics - 68, 96 (how I dislike you)
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This forum is more addictive than drugs. Still returning after licensure.

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BEC 80 (10/23/15)
FAR 72 (4/2/15); 83 (7/11/16)
REG 52 (4/28/15)
AUD (9/9/16)

Roger + NINJA MCQ + WTB

[jorden_rowrow]

what do you mean, it may or may not be

[Anonymous]

The “pretax financial income” is the (final) book income, and already includes the (non-taxable) municipal interest, long-term loss, and depreciation. Which is why they have to be adjusted to reach tax income. Nontaxable does not mean it should be excluded from book income.

[jorden_rowrow]

So I have two questions from your response, 1. I thought you don't include permanent differents in calculating the income from tax return. I only thought that permanent differences stayed in financial statements income calculation? My second question is doesn't the tax return only include temporary differences and financial statement income include permanent differences? I know this doesn't have to do with the question but when I saw the diagram I got confused because in becker there was no permanent differences in the tax return income.

[jorden_rowrow]

from reading the information this is what I thought originally:

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 Income

I know the answer is 140,000 * percent. But in terms of calculating income why isn't income for financial statement and tax return 155,000?

[Anonymous]

jorden_rowrow,

The permanent/temporary distinction applies to deferred tax assets/liabilities and is not a factor in the income calculation. A temporary difference (i.e. excess depreciation) needs to be recognized as a deferred asset/liability because it provides (or reduces) future benefits. A permanent difference does not. But both permanent and temporary differences have to be adjusted out of book income to reconcile with tax income.

[Anonymous]

becker doesnt explain this well enough

temporary differences that lead to DTA's/DTL's will eventually reverse. for example the depreciation: right now tax is higher but eventually there will be less depr basis and tax(MACRS method) will be lower than straight line(book method).so eventually the difference will REVERSE- and move the DTA's/DTL's from the balance sheet to the Income Statement. (that is what we are doing with these temporary differences- putting them on the balance sheet to recognize them in/against income later!

PERMANENT differences will NEVER reverse. muni income is nontaxable this period next period and always. period. it will never become taxable and reverse. BUT we still have it on the books for F/S reporting purposes- but because we did not pay tax on it we have to exclude it from calculation of tax expense. also, because we will NEVER pay tax on it we have to exclude it from the balance sheet and NOT do a DTA/DTL entry to it.

[Author]

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