Appendix: Accounting for Income Taxes in Interim Periods


Interim Reporting

IAS 34, Interim Financial Reporting, established new requirements for interim reporting, while not making the reporting of interim results mandatory. While the DSOP preceding this standard's promulgation essentially endorsed a discrete approach (applying measurement principles to each interim period on a stand-alone basis), the final standard represents a judicious mix of integral and discrete viewpoints. As noted in the main body of this chapter, IAS 34 adopts an integral viewpoint with regard to income tax expense, as indeed was necessitated by the fact that taxing authorities almost universally apply their requirements to a full year, taken as a whole, with no attempt at interim measurement of results of operations.

In this appendix, supplementary guidance is offered, largely based on US GAAP, to assist in applying the principles of income tax accounting set forth in IAS 12 to interim periods when the enterprise elects (or is required by local law) to report on such as basis. This guidance should be understood as being illustrative rather than authoritative. Care should be taken in particular regarding areas of financial reporting which are guided by recently issued or revised international accounting standards (such as that for discontinuing operations).

The general consensus is that the appropriate perspective for interim period reporting is to view the interim period as an integral part of the year rather than as a discrete period. For purposes of computing income tax provisions, this objective is usually achieved by projecting income for the full annual period, computing the tax thereon, and applying the effective rate to the interim period income or loss, with quarterly (or monthly) revisions to the expected annual results and the tax effects thereof, as necessary.

Notwithstanding this general principle, however, there are certain complexities that arise only in the context of interim financial reporting. Included in this group of issues are (1) recognizing the tax benefits of losses based on expected earnings of later interim or annual periods, (2) reporting the benefits of net operating loss carryforwards in interim periods, and (3) reporting the effects of tax law changes in interim periods. Other matters requiring interpretation include the classification of deferred taxes on interim balance sheets and the allocation of interim period tax provisions between current and deferred expense.

Basic example of interim period accounting for income taxes

start example

Andorra Woolens, Inc. estimates that accounting profit for the full fiscal year ending June 30, 2003, will be $400,000. The company expects amortization of goodwill for the year to be $30,000, the annual premium on an officer's life insurance policy is $12,000, and dividend income (from a less than 20% ownership interest) is expected to be $100,000. Under pertinent tax rules, goodwill is not amortizable and premiums paid on officer's life insurance is not an expense. Furthermore, there is a dividends received deduction of 70% for intercorporate investments of under 20%.

The company recognized income of $75,000 in the first quarter of the year. The deferred tax liability arises solely in connection with depreciation temporary differences; these differences totaled $150,000 at the beginning of the year and are projected to equal $280,000 at year-end. The effective rate expected to apply to the reversal at both year beginning and year-end is 34%. The change in the taxable temporary difference during the current interim period is $30,000.

Andorra Woolens must first calculate its estimated effective income tax rate for the year. This rate is computed using all the tax planning alternatives available to the company (e.g., tax credits, foreign rates, capital gains rates, etc.).

Estimated pretax accounting income

$ 400,000

Permanent differences:

  • Add: Nondeductible officer's life insurance premium

$12,000

    • Nondeductible amortization of organization costs

30,000

42,000

442,000

  • Less: Dividends received deduction ($100,000 x 70%)

(70,000)

Estimated book taxable income

372,000

  • Less: Change in taxable temporary difference

(130,000)

Estimated taxable income for the year

$ 242,000

Tax on estimated taxable income (see below)

$ 70,530

Effective tax rate for current tax provision [$70,530/($400,000 - $130,000)]

26.1%

Tax rate schedule

Taxable

At least

Not more than

Rate

income

Tax

$ --

$50,000

15%

$ 50,000

$ 7,500

50,000

75,000

25%

25,000

6,250

75,000

--

34%

167,000

56,780

$70,530

The deferred tax provision for the interim period should be based on the actual change in the temporary difference (depreciation, in this example) during the interim period. In this case the depreciation temporary difference grew by $30,000 during the period, and the expected tax rate that will apply to the reversal, in future years, is the marginal rate of 34%. Accordingly, the tax provision for the period is as follows:

Ordinary income for the interim period

$75,000

  • Less: Change in temporary difference

30,000

Net ordinary income

45,000

Applicable tax rate

26.1%

Current tax provision

$11,755

Tax effect of temporary difference ($30,000 x 34%)

10,200

Total provision

$21,955

Therefore, the entry necessary to record the income tax expense at the end of the first quarter is as follows:

Income tax expense

21,955

  • Income taxes payable—current

11,755

  • Deferred tax liability

10,200

The financial statement presentation would remain the same as has been illustrated in prior examples.

In the second quarter, Andorra Woolens, Inc. revises its estimate of income for the full fiscal year. It now anticipates only $210,000 of book income, including only $75,000 of dividend income, because of dramatic changes in the national economy. Other permanent differences are still expected to total $42,000.

Estimated pretax accounting income

$210,000

Permanent differences:

  • Add: Nondeductible officer's life insurance premium

$12,000

  • Nondeductible amortization of organization costs

30,000

42,000

252,000

  • Less: Dividends received deduction ($75,000 x 70%)

(52,500)

Estimated book taxable income

199,500

  • Less: Change in taxable temporary difference

(130,000 )

Estimated taxable income for the year

$ 69,500

Tax on estimated taxable income see below)

$ 12,375

Effective tax rate for current tax provision

[$12,375/($210,000 - $130,00)]

15.5%

Tax rate schedule

At least

Not more than

Rate

Taxable income

Tax

$ --

$50,000

15%

$ 50,000

$ 7,500

50,000

75,000

25%

19,500

4,875

$12,375

The actual earnings for the second quarter were $22,000, and the change in the temporary difference was only $10,000. The tax provision for the second quarter is computed as follows:

Ordinary income for the half year

$97,000

  • Less: Change in temporary difference

40,000

Net ordinary income

57,000

Applicable tax rate

15.5%

Current tax provision

$ 8,835

Tax effect of temporary difference ($40,000 x 34%)

13,600

Total provision

$22,435

Under the general principle that changes in estimate are reported prospectively, the results of prior quarters are not restated for changes in the estimated effective annual tax rate. Given the provision for current and deferred income taxes that was made in the first interim period, shown above, the following entry is required to record the income taxes as of the end of the second quarter:

Income tax expense

480

Income taxes payable—current

2,920

  • Deferred tax liability

3,400

end example

The foregoing illustrates the basic problems encountered in applying the promulgated GAAP to interim reporting. In the following paragraphs, we discuss some items requiring modifications to the approach described above.

Net Operating Losses in Interim Periods

The tax effects of operating losses are treated no differently than any other temporary differences; if probable of being realized, the tax effects are reflected as deferred tax benefits in the period the loss is incurred. If not deemed probable, no tax effects are recognized; if the estimation of realizability changes in a later period, the deferred tax benefit is then recorded, with the offset being included in current period tax expense. However, given the desire to treat interim periods as integral parts of the annual period of which they are a component, the accounting treatment of net operating losses raises a number of issues. These include (1) calculation of the expected annual tax rate for purposes of interim period income tax provisions and (2) recognition of an asset for the tax effects of a loss carryforward.

Carryforward from prior years.

Loss carryforward benefits from prior years first given recognition (i.e., by recordation of a deferred tax benefit when none had been recognized in the period the loss was incurred) in interim periods are included in the ordinary tax provision. Common practice is to compute the expected annual effective tax rate on ordinary income at each interim reporting date, and use this rate to provide income taxes on ordinary income on a cumulative basis at each interim date. The tax effects of extraordinary items, discontinued operations, and other nonoperating categories were excluded from this computation: those tax effects are typically separately determined on a with-and-without basis, as explained later in this appendix.

Recognition of a previously unrecognized tax benefit should be included as a credit in the tax provision of the interim period when there is a reevaluation of the likelihood of future tax benefits being realized. Similarly, a reduction of the deferred tax benefit resulting from a revised judgment that the benefits are not probable of being realized would cause a catch-up adjustment to he included in the current interim period's ordinary tax provision. In either situation, the effect is not prorated to future interim periods by means of the effective tax rate estimate. To illustrate, consider the following example.

Example of carryforward from prior years

start example

Dacca Corporation has a previously unrecognized $50,000 net operating loss carryforward; a flat 40% tax rate for current and future periods is assumed. Income for the full year (before NOL) is projected to be $80,000: in the first quarter a pretax loss of $10,000 will be reported.

Projected annual income

$80,000

x Tax rate

40%

Projected tax liability

$32,000

Accordingly, in the income statement for the first fiscal quarter, the pretax operating loss of $10,000 will give rise to a tax benefit of $10,000 x 40% = $4,000.

In addition, a tax benefit of $20,000 ($50,000 loss carryforward x 40%) is given recognition and is included in the current interim period tax provision relating to continuing operations. Thus, total tax benefit for the first fiscal quarter will be $24,000 (= $4,000 + $20,000).

If Dacca's second quarter results in a pretax operating income of $30,000, and the expectation for the full year remains unchanged (i.e., operating income of $80,000), the second quarter tax provision is $12,000 ($30,000 x 40%).

The tax provision for the fiscal first half-year will be a benefit of $12,000, as follows:

Cumulative pretax income through second quarter ($30,000 - $10,000)

$ 20,000

x Effective rate

40%

Tax provision before recognition of NOI, carryforward benefit

$ 8,000

Benefit of NOL carryforward first recognized in first quarter

(20,000)

Total tax provision (benefit)

$(12,000)

The foregoing example assumes that during the first quarter, Dacca's judgment changed as to the full realizability of the previously unrecognized benefit of the $50,000 loss carryforward. Were this not the case, however, the benefit would have been recognized only as actual tax liabilities were incurred (through current period earnings) in amounts to offset the NOL benefit.

To illustrate the latter situation, assume the same facts about earnings for the first two quarters, and assume now that Dacca's judgment about realizability of prior period NOL does not change. Tax provisions for the first quarter and first half are as follows:

First quarter

First half-year

Pretax income (loss)

$(l0,000)

$20.000

x Effective rate

40%

40%

Tax provision before recognition of NOL carryforward benefit

$ (4,000)

$ 8,000

Benefit of NOL carryforward recognized

0

(8,000)

Tax provision (benefit)

$ (4,000)

$ 0

Notice that recognition of a tax benefit of $4,000 in the first quarter is based on the expectation of at least a breakeven full year's results. That is, the benefit of the first quarter's loss was deemed probable of realization. Otherwise, no tax benefit would have been reported in the first quarter.

end example

Estimated loss for the year.

When the full year is expected to be profitable, it will be irrelevant that one or more interim periods results in a loss, and the expected effective rate for the full year should be used to record interim period tax benefits, as illustrated above. However, when the full year is expected to produce a loss, computation of the expected annual tax benefit rate must logically take into account the extent to which a deferred tax asset will be recordable at year-end. For the first set of examples, below, assume that the realization of tax benefits related to operating loss carryforwards are not entirely probable. That is, only a portion of the benefits will be recognized.

For each of the following examples we assume that the L'avventura Corporation is anticipating a loss for the fiscal year of $150,000. A deferred tax liability of $30,000 is currently recorded on the company's books; all of the credits will reverse in the fifteen-year carryforward period permitted by applicable tax law. Assume that future taxes will be at a 40% rate.

Example 1

start example

Assume that the company can carry back the entire $150,000 to the preceding three years. The tax potentially refundable by the carryback would (remember, this is only an estimate until year-end) amount to $48,000 (an assumed amount). The effective rate is then 32% ($48,000/$150,000).

Ordinary income (loss)

Tax (benefit) expense

Reporting period

Reporting period

Year-to-date

Year-to-date

Less previously provided

Reporting period

1st qtr.

$ (50,000)

$ (50,000)

$(16,000)

$ --

$(16,000)

2nd qtr.

20,000

(30,000)

(9,600)

(16,000)

6,400

3rd qtr.

(70,000)

(100,000)

(32,000)

(9,600)

(22,400)

4th qtr.

(50,000)

(150,000)

(48,000)

(32,000)

(16,000)

Fiscal year

$(150,000)

$(48,000)

Note that both the income tax expense (2nd quarter) and benefit are computed using the estimated annual effective rate. This rate is applied to the year-to-date numbers just as in the previous examples, with any adjustment being made and realized in the current reporting period. This treatment is appropriate because the accrual of tax benefits in the first, third, and fourth quarters is consistent with the effective rate estimated at the beginning of the year; in contrast to those circumstances in which a change in estimate is made in a quarter relating to the realizability of tax benefits not provided previously (or provided for only partially).

end example

Example 2

start example

In this case assume that L'avventura Corporation can carry back only $50,000 of the loss and that the remainder must be carried forward. Realization of income to offset the loss is not deemed to be probable. The estimated carryback of $50,000 would generate a tax refund of $12,000 (again assumed). The company is assumed to be in the 40% tax bracket (a flat rate is used to simplify the example). The benefit of the operating loss carryforward is recognized only to the extent that it is deemed to be probable of realization. In this example, management has concluded that only one-fourth of the gross benefit will be realized in future years. Accordingly, only $10,000 of estimated tax benefit related to the carryforward of the projected loss is recordable. Considered in conjunction with the carryback of $12,000, the company will obtain a $22,000 tax benefit relating to the projected current year loss, for an effective tax benefit rate of 14.7%. The calculation of the estimated annual effective rate is as follows:

Expected net loss

$150,000

Tax benefit from carryback

$12,000

  • Benefit of carryforward ($100,000 x 40%)

$40,000

  • Portion not deemed to be probable of realization

(30,000)

10,000

Total recognized benefit

$ 22,000

Estimated annual effective rate ($22,000 $150,000)

14,7%

Ordinary income (loss)

Tax (benefit) expense

Reporting period

Reporting period

Year-to-date

Year-to-date

Less previously provided

Reporting period

Computed

Limited to

1 st qtr.

$ 10,000

$ 10,000

$ 1,470

$ --

$ --

$ 1,470

2nd qtr.

(80,000)

(70,000)

(11,733)

--

1,470

(10,263)

3rd qtr.

(100,000)

(170,000)

(14,667)

(22.000)

(10,263)

(4,404)

4th qtr.

20,000

(150,000)

(22,000)

--

(22,000)

--

Fiscal year

$(150,000)

$(22,000)

In the foregoing, the tax expense (benefit) is computed by multiplying the year-to-date income or loss by the estimated annual effective rate, and then subtracting the amount of tax liability or benefit provided in prior interim periods. It makes no difference if the current period indicates an income or a loss, assuming of course that the full-year estimated results are not being revised. However, if the cumulative loss for the interim periods to date exceeds the projected loss for the full year on which the effective tax benefit rate had been based, no further tax benefits can be recorded, as illustrated above in the provision for the third quarter.

end example

Operating loss occurring during an interim period.

An instance may occur in which the company expects net income for the year and incurs a net loss during one of the reporting periods. In this situation, the estimated annual effective rate, which was calculated based on the expected net income figure, is applied to the year-to-date income or loss to arrive at a total year-to-date tax provision. The amount previously provided is subtracted from the year-to-date figure to arrive at the provision for the current reporting period. If the current period operations resulted in a loss, the tax provision for the period will reflect a tax benefit.

Tax Provision Applicable to Discontinuing Operations or Extraordinary Items Occurring in Interim Periods

Extraordinary items.

Extraordinary items and discontinuing operations are to be shown net of their related tax effects. The interim treatment accorded these items does not differ from the fiscal year-end reporting required by GAAP. However, common practice is not to include these items in computation of the estimated annual tax rate. These items are generally recognized in the interim period in which they occur; that is, they are not annualized. Recognition of the tax effects of a loss due to any of the aforementioned situations would be made if the benefits are expected to be realized during the year or if they will be recognizable as a deferred tax asset at year-end under the provisions of IAS 12.

If a situation arises where realization is not probable in the period of occurrence but becomes assured in a subsequent period in the same fiscal year, the previously unrecognized tax benefit should be reported in income from continuing operations until it reduces the tax provision to zero, with any excess reported in other categories of income (e.g., discontinuing operations) that provided a means of realization for the tax benefit.

The following examples illustrate the treatment required for reporting extraordinary items. Again, these items are not to be used in calculating the estimated annual tax rate. For income statement presentation purposes, extraordinary items are shown net of their applicable tax provision.

The following data apply to the next two examples:

  1. Dynamix Company expects fiscal year ending June 30, 2003, income to be $96,000 and net permanent differences to reduce taxable income by $25,500.

  2. Dynamix Company also incurred a $30,000 extraordinary loss in the second quarter of the year.

Example 1

start example

In this case, assume that the loss can be carried back to prior periods, and therefore the realization of any tax benefit is assured. Based on the information given earlier, the estimated annual effective tax rate can be calculated as follows:

Expected pretax accounting income

$96,000

Anticipated permanent differences

(25,500)

  • Expected taxable income

$70,500

Tax Calculation "Excluding" Extraordinary Item

$50,000

x

0.15

=

$ 7,500

20,500

x

0.25

=

5,125

$70,500

$12,625

Effective annual rate = 13.15% ($12,625 $96,000)

No adjustment in the estimated annual effective rate is required when the extraordinary, unusual, or infrequent item occurs. The tax (benefit) applicable to the item is computed using the estimated fiscal year ordinary income and an analysis of the incremental impact of the extraordinary item. The method illustrated below is applicable when the company anticipates operating income for the year. When a loss is anticipated but realization of benefits of loss carryforwards is not probable, the company computes its estimated annual effective rate based on the amount of tax to be refunded from prior years. The tax (benefit) applicable to the extraordinary item is then the decrease (increase) in the refund to be received.

Computation of the tax applicable to the extraordinary item is as follows:

Estimated pretax accounting income

$96,000

Permanent differences

(25,500)

Extraordinary item

(30,000)

  • Expected taxable income

$40,500

Tax Calculation "Including" Extraordinary Item

$40,500 x 0.15 = $6,075

Tax "excluding" extraordinary item

$12,625

Tax "including" extraordinary item

6,075

  • Tax benefit applicable to extraordinary item

$ 6,550

Tax (benefit) applicable to

Reporting period

Ordinary-income (loss)

Extraordinary item

Ordinary income (loss)

Extraordinary item

Reporting period

Year-to-date

Year-to-dale

Previously provided

Reporting period

1st qtr.

$10,000

$ --

$ 1,315

$ 1,315

$ --

$ --

$ --

2nd qtr.

(20,000)

(30,000)

(2,630)

(1,315)

(6,550)

--

(6,550)

3rd qtr.

40,000

--

5,260

(3,945)

(6,550)

(6,550)

--

4th qtr.

66,000

--

8,680

(12,625)

(6,550)

(6,550)

--

Fiscal year

$96,000

$(30,000)

$12,625

$(6,550)

end example

Example 2

start example

Again, assume that Dynamix Company estimates net income of $96,000 for the year with permanent differences of $25,500 that reduce taxable income. The extraordinary loss of $30,000 cannot he carried back and the ability to carry it forward is not probable. Because no deferred tax credits exist, the only way that the loss can be deemed to be realizable is to the extent that current year ordinary income offsets the effect of the loss. As a result, realization of the loss is assured only as, and to the extent that, there is ordinary income for the year.

Tax (benefit) applicable to

Reporting period

Ordinary income (loss)

Extraordinary item

Ordinary income (loss)

Extraordinary item

Reporting period

Year-to-date

Year-to-date

Previously provided

Reporting period

1st qtr.

$5,000

$ --

$ 658

$ 658

$ --

$ --

$ --

2nd qtr.

20,000

(30,000)

2,630

3,288

(3,288)[a]

--

(3,288)

3rd qtr.

(10,000)

--

(1,315)

1,973

(1,973)[a]

(3,288)

1,315

4th qtr.

81,000

--

10,652

12,625

(6,550)[a]

(1,973)

(4,577)

Fiscal year

$96,000

$(30,000)

$12,625

$(6,550)

[a]The recognition of the tax benefit to be realized relative to the extraordinary item is limited to the lesser of the total lax benefit applicable to the item or the amount available to be realized. Because realization is based on the amount of tax applicable to ordinary income during the period, the year-to-date figures for the tax benefit fluctuate as the year-to-date tax expense relative to ordinary income fluctuates. Note that at no point does the amount of the tax benefit exceed what was calculated above as being applicable to the extraordinary item.

end example

Discontinuing operations in interim periods.

The computations described for extraordinary items will also apply to the income (loss) from the discontinuing segment, including any provisions for operating gains (losses) subsequent to the measurement date.

If the decision to dispose of operations occurs in any interim period other than the first period, the operating income (loss) applicable to the discontinuing segment has already been used in computing the estimated annual effective tax rate. Therefore, a recomputation of the total tax is not required. However, the total tax is to be divided into two components.

  1. That tax applicable to ordinary income (loss)

  2. That tax applicable to the income (loss) from the discontinuing segment

This division is accomplished as follows: A revised estimated annual effective rate is calculated for the income (loss) from ordinary operations. This recomputation is then applied to the ordinary income (loss) from the preceding periods. The total tax applicable to the discontinuing segment is then composed of two items.

  1. The difference between the total tax originally computed and the tax recomputed on remaining ordinary income

  2. The tax computed on unusual, infrequent, or extraordinary items as described above

Example

start example

Realtime Corporation anticipates net income of $150,000 during the fiscal year. The net permanent differences for the year will be $10,000. The company also anticipates tax credits of $10,000 during the fiscal year. For purposes of this example, we assume a flat statutory rate of 50%. The estimated annual effective rate is then calculated as follows:

Estimated pretax income

$150,000

Net permanent differences

(10,000)

  • Taxable income

140,000

Statutory rate

50%

Tax

70,000

Anticipated credits

(10,000)

  • Total estimated tax

$60,000

Estimated effective rate ($60,000 $150,000)

40%

The first two quarters of operations were as follows:

Ordinary income (loss)

Tax provision

Reporting period

Reporting period

Year-to-date

Year-to-date

Less previously provided

Reporting period

1 st qtr.

$30,000

$30,000

$12,000

$ --

$12,000

2nd qtr.

25,000

55,000

22,000

12,000

10,000

In the third quarter, Realtime made the decision to dispose of Division X. During the third quarter, the company earned a total of $60,000. The company expects the disposal to result in a onetime charge to income of $50,000 and estimates that operating losses subsequent to the disposal will be $25,000. The company estimates revised ordinary income in the fourth quarter to be $35,000. The two components of pretax accounting income (discontinuing operations and revised ordinary income) are shown below.

Division X

Reporting period

Revised ordinary income

Loss from operations

Provision for loss on disposal

1st qtr.

$ 40,000

$(10,000)

$ --

2nd qtr.

40,000

(15,000)

--

3rd qtr.

80,000

(20,000)

(75,000)

4th qtr.

35,000

--

--

Fiscal year

$195,000

$(45,000)

$(75,000)

Realtime must now recompute the estimated annual tax rate. Assume that all the permanent differences are related to the revised continuing operations. However, $3,300 of the tax credits were applicable to machinery used in Division X. Because of the discontinuance of operations, the credit on this machinery would not be allowed. Any recapture of prior period credits must be used as a reduction in the tax benefit from either operations or the loss on disposal. Assume that the company must recapture $2,000 of investment tax credit which is related to Division X.

The recomputed estimated annual rate for continuing operations is as follows:

Estimated (revised) ordinary income

$195,000

Less net permanent differences

(10,000)

$185,000

Tax at statutory rate of 50%

$ 92,500

Less anticipated credits from continuing operations

(6,700)

  • Tax provision

$ 85,800

Estimated annual effective tax rate ($85,800 $195,000)

44%

The next step is then to apply the revised rate to the quarterly income from continuing operations as illustrated below.

Ordinary income

Estimated annual effective rate

Tax provision

Reporting period

Reporting period

Year-to-date

Year-to-date

Less previously provided

Reporting period

1st qtr.

$ 40,000

$ 40,000

44%

$17,600

$ --

$17,600

2nd qtr.

40,000

80,000

44%

35,200

17,600

17,600

3rd qtr.

80,000

160,000

44%

70,400

35,200

35,200

4th qtr.

35,000

195,000

44%

85,800

70,400

15,400

Fiscal year

$195,000

$85,800

The tax benefit applicable to the operating loss from discontinuing operations and the loss from the disposal must now be calculated. The first two quarters are calculated on a differential basis as shown below.

Tax applicable to ordinary income

Tax (benefit) expense applicable to Division X

Reporting period

Previously reported

Recomputed (above)

1 st qtr.

$ 12,000

$17,600

$ (5,600)

2nd qtr.

10,000

17,600

(7,600)

$(13,200)

The only calculation remaining applies to the third quarter tax benefit pertaining to the operating loss and the loss on disposal of the discontinuing segment. The calculation of this amount is made based on the revised estimate of annual ordinary income, both including and excluding the effects of the Division X losses. This is shown below.

Loss from operations of Division X

Provision for loss on Disposal

Estimated annual income from continuing operations

$195,000

$195,000

Net permanent differences

(10,000)

(10,000)

Loss from Division X operations

(45,000)

--

Provision for loss on disposal of Division X

--

(75,000)

  • Total

$140,000

$110,000

Tax at the statutory rate of 50%

$ 70,000

$ 55,000

Anticipated credits (from continuing operations)

(6,700)

(6,700)

Recapture of previously recognized tax credits as a result of disposal

--

2,000

Taxes after effect of Division X losses

63,300

50,300

Taxes computed on estimated income before the effect of Division X losses

85,800

85,800

Tax benefit applicable to Division X

(22,500)

(35,500)

Amounts recognized in quarters one and two ($5,600 + $7,600)

(13,200)

--

Tax benefit to be recognized in the third quarter

$ (9,300)

$ (35,000)

The quarterly tax provisions can be summarized as follows:

Pretax income (loss)

Tax (benefit) applicable to

Reporting period

Continuing operations

Operations of Division X

Provision for loss on disposal

Continuing operations

Operations of Division X

Provision for loss on disposal

1 st qtr.

$ 40,000

$(10,000)

$ --

$17,600

$ (5,600)

$ --

2nd qtr.

40,000

(15,000)

--

17,600

(7,600)

--

3rd qtr.

80,000

(20,000)

(75.000)

35,200

(9,300)

(35,500)

4th qtr.

35,000

--

--

15,400

--

--

Fiscal year

$195,000

$(45,000)

$(75,000)

$85,800

$(22,500)

$(35,500)

The following income statement shows the proper financial statement presentation of these unusual and infrequent items. The notes to the statement indicate which items are to be included in the calculation of the annual estimated rate.

Income Statement

Net sales [a]

$xxxx

Other income[a]

xxx

xxxx

Costs and expenses

  • Cost of sales[a]

$xxxx

  • Selling, general, and administrative expenses[a]

xxx

  • Interest expense[a]

xx

  • Other deductions[a]

xx

  • Unusual items

xxx

  • Infrequently occurring items

xxx

xxxx

Income (loss) from continuing operations before income taxes and other items listed below

xxxx

Provision for income taxes (benefit) [b]

xxx

Income (loss) from continuing operations before items listed below

xxxx

Discontinuing operations:

  • Income (loss) from operations of discontinuing Division X (less applicable income taxes of $xxxx)

xxxx

  • Income (loss) on disposal of Division X, including provision of $xxxx for operating losses during phaseout period (less applicable taxes of $xxxx)

xxxx

xxxx

Income (loss) before extraordinary items and cumulative effect of a change in accounting principle

xxxx

Extraordinary items (less applicable income taxes of $xxxx)

xxxx

Cumulative effect on prior years of a change in accounting principle (less applicable income taxes of $xxxx [c])

xxxx

Net income (loss)

$xxxx

[a]Components of ordinary income (loss).

[b]Consists of total income taxes (benefit) applicable to ordinary income (loss), unusual items, and infrequent items.

[c]This amount is shown net of income taxes. Although the income taxes are generally disclosed (as illustrated), this is not required.

end example




Wiley Ias 2003(c) Interpretation and Application of International Accounting Standards
WILEY IAS 2003: Interpretation and Application of International Accounting Standards
ISBN: 0471227366
EAN: 2147483647
Year: 2005
Pages: 147

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