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Chapter 19: 19Q (page 1093)

What is an uncertain tax position, and what are the general guidelines for accounting for uncertain tax positions?

Short Answer

Expert verified

International Financial Reporting System (or IFRS) is an institution that formulates the reporting standard for each organization to work universally by reporting each financial transaction.

Step by step solution

01

Introduction to uncertain tax position

An uncertain tax position is a term that depicts the uncertainties faced by an organization where the income tax items that has to be claimed or have been already claimed under the income tax filing authority. It arises due to any mishap or contingency that affects the organization's income tax expense.

02

General guidelines under the uncertain tax positions

The general guidelines as per the IFRS for the uncertain tax position involves following two steps

(1) Recognition

(2) Measurement

Recognition: It involves recognizing the actual tax position of the firm using the MLTN threshold test, i.e., more likely than not. It helps the organization ascertain its tax position according to the technical merits.

Measurement: It involves measuring the income tax benefit arising from the MLTN test. If the measurement is more than 50%, the tax authority is more likely to realize the amount.

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Most popular questions from this chapter

Presented below are two independent situations related to future taxable and deductible amounts resulting from temporary differences existing at December 31, 2017. 1. Mooney Co. has developed the following schedule of future taxable and deductible amounts. 2018 2019 2020 2021 2022 Taxable amounts \(300 \)300 \(300 \) 300 \(300 Deductible amount 鈥� 鈥� 鈥� (1,600) 鈥� 2. Roesch Co. has the following schedule of future taxable and deductible amounts. 2018 2019 2020 2021 Taxable amounts \)300 \(300 \) 300 \(300 Deductible amount 鈥� 鈥� (2,300) 鈥� Both Mooney Co. and Roesch Co. have taxable income of \)4,000 in 2017 and expect to have taxable income in all future years. The tax rates enacted as of the beginning of 2017 are 30% for 2017鈥�2020 and 35% for years thereafter. All of the underlying temporary differences relate to noncurrent assets and liabilities. Instructions For each of these two situations, compute the net amount of deferred income taxes to be reported at the end of 2017, and indicate how it should be classified on the balance sheet.

Assume the same information as E19-12, except that at the end of 2016, Jennifer Capriati Corp. had a valuation account related to its deferred tax asset of $45,000. Instructions (a) Record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming that it is more likely than not that the deferred tax asset will be realized in full. (b) Record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming that it is more likely than not that none of the deferred tax asset will be realized.

Dexter Company appropriately uses the asset-liability method to record deferred income taxes. Dexter reports depreciation expense for certain machinery purchased this year using the modified accelerated cost recovery system (MACRS) for income tax purposes and the straight-line basis for financial reporting purposes. The tax deduction is the larger amount this year. Dexter received rent revenues in advance this year. These revenues are included in this year鈥檚 taxable income. However, for financial reporting purposes, these revenues are reported as unearned revenues, a current liability. Instructions (c) How should Dexter classify the deferred tax consequences of the temporary differences on its balance sheet?

Callaway Corp. has a deferred tax asset account with a balance of \(150,000 at the end of 2017 due to a single cumulative temporary difference of \)375,000. At the end of 2018, this same temporary difference has increased to a cumulative amount of \(500,000. Taxable income for 2018 is \)850,000. The tax rate is 40% for all years.

Instructions

(a)Record income tax expense, deferred income taxes, and income taxes payable for 2018, assuming that it is probable that the deferred tax asset will be realized.

(b) Assuming that it is probable that $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2018 to recognize this probability.

Differentiate between 鈥渓oss carryback鈥� and 鈥渓oss carryforward.鈥� Which can be accounted for with the greater certainty when it arises? Why?
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