1.  What is an “Income Tax Provision”?

2  True orFalse: ASC 740 applies to all taxes paid by a corporation.   

            False.  ASC 740 only applies to income taxes paid bya corporation.

3. True or False:ASC 740 is the sole source for the rules that apply to accounting for incometaxes.  Explain.

            False.  With the Accounting Standards Codification,the rules that apply to accounting for income taxes are found primarily in ASC740.  The codification includes rulespreviously found in pronouncements from the Emerging Issues Task Force,opinions from the former Accounting Principles Board, and pronouncements fromthe Securities and Exchange Commission. ASC 740 does not include the income tax accounting rules that apply toaccounting for stock compensation or business combinations. These rules arefound in ASC 718-740 and ASC 805-740, respectively.

4.ASC740 has two important objectives.  Whatare they?

(1)  To “recognize the amount of income taxespayable or refundable in the currentyear” (referred to as the current tax liability or asset).

(2)  To “recognize deferred tax liabilities andassets for the (expected) future taxconsequences of events that have been recognized in an enterprise’s financialstatements or tax returns.”

5. What are the two components of a company’s income taxprovision?  What does each componentrepresent about a company’s income tax provision?

            Acompany computes its current income tax expense or benefit and its deferredincome tax expense or benefit.  Thecurrent income tax expense or benefit represents the income taxes payable orrefundable in the current year.  Thedeferred income tax expense or benefit represents the amount necessary toadjust the balance sheet liability or receivable for future income taxespayable or refundable that result from current and prior year transactions.

6. How does the fact that most corporations file theirfinancial statements several months before they file their income tax returnscomplicate the income tax provision process?

            Whena corporation files its financial statements in advance of its federal incometax return, management must use judgment to estimate the actual tax liabilitythat will result when the tax return is filed. When the tax return is filed, the corporation must adjust its balancesheet to reflect the actual taxes payable and make any other adjustments toreflect the company’s “true” current and deferred tax liabilities.  This adjustment often is referred to as a“return-to-provision” adjustment or a “true-up.”  Tax technology software allows the taxdepartment to make book-to-tax adjustments in real time, shortening the closeprocess and making the tax provision estimate more accurate.

7. Briefly describe the six step process by which a companycomputes its income tax provision.

            Thesteps to compute a company’s federal income tax provision proceed as follows:

1.             Adjustpre-tax net income for all permanent differences

2.             Identify alltemporary differences and tax carryforward amounts

3.             Calculate thecurrent income tax expense or benefit (refund)

4.             Determine theending balances in the balance sheet deferred tax asset and liability accounts

5.             Evaluate theneed for a valuation allowance for gross deferred tax assets

6.             Calculate thedeferred income tax expense or benefit

8. What is a“valuation allowance”?

A valuation allowance is required if it is more likely than not thatsome or all of the deferred tax asset will not be realized in the future.

9. What is FIN 48 and how does it apply to the Income TaxProvision

FIN48 (ASC740-10) requires a two-step process in determining if a taxbenefit can be recognized in the financial statements.

(1)  Step 1: Recognition

(a)  A company determines if it is more likelythan not that its tax position on a particular account will be sustained on IRSexamination based on its technical merits.

(2)  Step 2: Measurement

(a)  A company determines the amount it expectsto be able to recognize.

(b)  The measurement process requires the companyto make a cumulative probability assessment of all likely outcomes of the auditand litigation process.

(c)  The companyrecognizes the amount that has a greater than 50 percent probability of beingsustained on examination and subsequent litigation.

(d)  The amount not recognized is recorded as aliability on the balance sheet.

10. What two things are required to be reconciled regardingthe Income Tax Provision, and included in the Notes to the FinancialStatements?

(1)  Reported income tax provision attributableto continuing operations with.

(2)  The amount of income tax expense that wouldresult from applying its U.S. statutory tax rate to its pretax net income orloss from continuing operations.