CHAPTER19ACCOUNTINGFORINCOMETAXESIntermediateAccounting13thEditionKieso,Weygandt,andWarfield

Identifydifferencesbetweenpretaxfinancialincomeandtaxableincome.Describeatemporarydifferencethatresultsinfuturetaxableamounts.Describeatemporarydifferencethatresultsinfuturedeductibleamounts.Explainthepurposeofadeferredtaxassetvaluationallowance.Describethepresentationofincometaxexpenseintheincomestatement.Describevarioustemporaryandpermanentdifferences.Explaintheeffectofvarioustaxratesandtaxratechangesondeferredincometaxes.Applyaccountingproceduresforalosscarrybackandalosscarryforward.Describethepresentationofdeferredincometaxesinfinancialstatements.Indicatethebasicprinciplesoftheasset-liabilitymethod.LearningObjectivesFundamentalsofAccountingforIncomeTaxesFuturetaxableamountsanddeferredtaxesFuturedeductibleamountsanddeferredtaxesIncomestatementpresentationSpecificdifferencesRateconsiderationsAccountingforNetOperatingLossesFinancialStatementPresentationReviewofAsset-LiabilityMethodLosscarrybackLosscarryforwardLosscarrybackexampleLosscarryforwardexampleBalancesheetIncomestatementUncertaintaxpositionsAccountingforIncomeTaxesCorporationsmusttaxreturnsfollowingtheguidelinesdevelopedbytheInternalRevenueService(IRS),thusthey:LO1Identifydifferencesbetweenpretaxfinancialincomeandtaxableincome.FundamentalsofAccountingforIncomeTaxescalculatetaxespayablebaseduponIRScode,calculateincometaxexpensebaseduponGAAP.AmountreportedastaxexpensewilloftendifferfromtheamountoftaxespayabletotheIRS.TaxCodeExchangesInvestorsandCreditorsFinancialStatementsPretaxFinancialIncomeGAAPIncomeTaxExpenseTaxableIncomeIncomeTaxPayableTaxReturnvs.IRSFundamentalsofAccountingforIncomeTaxesLO1Identifydifferencesbetweenpretaxfinancialincomeandtaxableincome.Illustration19-1Illustration:KRC,Inc.reportedrevenuesof$130,000andexpensesof$60,000ineachofitsfirstthreeyearsofoperations.Fortaxpurposes,KRCreportedthesameexpensestotheIRSineachoftheyears.KRCreportedtaxablerevenuesof$100,000in2010,$150,000in2011,and$140,000in2012.WhatistheeffectontheaccountsofreportingdifferentamountsofrevenueforGAAPversustax?LO1Identifydifferencesbetweenpretaxfinancialincomeandtaxableincome.FundamentalsofAccountingforIncomeTaxesRevenuesExpensesPretaxfinancialincomeIncometaxexpense(40%)$130,00060,000$70,000$28,000$130,000201160,000$70,000$28,000$130,000201260,000$70,000$28,000$390,000Total180,000$210,000$84,000GAAPReportingRevenuesExpensesPretaxfinancialincomeIncometaxpayable(40%)$100,000201060,000$40,000$16,000$150,000201160,000$90,000$36,000$140,000201260,000$80,000$32,000$390,000Total180,000$210,000$84,000TaxReporting2010LO1Identifydifferencesbetweenpretaxfinancialincomeandtaxableincome.Bookvs.TaxDifferenceIllustration19-2Illustration19-3Incometaxexpense(GAAP)Incometaxpayable(IRS)Difference$28,00016,000$12,000$28,000201136,000$(8,000)$28,000201232,000$(4,000)$84,000Total84,000$0Comparison2010Arethedifferencesaccountedforinthefinancialstatements?YearReportingRequirement201020112012Deferredtaxliabilityaccountincreasedto$12,000Deferredtaxliabilityaccountreducedby$8,000Deferredtaxliabilityaccountreducedby$4,000YesLO1Identifydifferencesbetweenpretaxfinancialincomeandtaxableincome.Bookvs.TaxDifferenceIllustration19-4BalanceSheetAssets:Liabilities:Equity:Incometaxexpense 28,000IncomeStatementRevenues:Expenses:Netincome(loss)20102010Deferredtaxes 12,000Wheredoesthe“deferredtaxliability”getreportedinthefinancialstatements?Incometaxpayable 16,000LO1Identifydifferencesbetweenpretaxfinancialincomeandtaxableincome.FinancialReportingfor2010ATemporaryDifference

isthedifferencebetweenthetaxbasisofanassetorliabilityanditsreported(carryingorbook)amountinthefinancialstatementsthatwillresultintaxableamountsordeductibleamountsinfutureyears.FutureTaxableAmountsFutureDeductibleAmountsDeferredTaxLiabilityrepresentstheincreaseintaxespayableinfutureyearsasaresultoftaxabletemporarydifferencesexistingattheendofthecurrentyear.DeferredTaxAssetrepresentstheincreaseintaxesrefundable(orsaved)infutureyearsasaresultofdeductibletemporarydifferencesexistingattheendofthecurrentyear.Illustration19-22

ExamplesofTemporaryDifferencesLO2Describeatemporarydifferencethatresultsinfuturetaxableamounts.TemporaryDifferencesLO2Describeatemporarydifferencethatresultsinfuturetaxableamounts.FutureTaxableAmountsandDeferredTaxesIllustration:InKRC’ssituation,theonlydifferencebetweenthebookbasisandtaxbasisoftheassetsandliabilitiesrelatestoaccountsreceivablethatarosefromrevenuerecognizedforbookpurposes.KRCreportsaccountsreceivableat$30,000intheDecember31,2010,GAAP-basisbalancesheet.However,thereceivableshaveazerotaxbasis.Illustration19-5LO2Describeatemporarydifferencethatresultsinfuturetaxableamounts.FutureTaxableAmountsandDeferredTaxesKRCassumesthatitwillcollecttheaccountsreceivableandreportthe$30,000collectionastaxablerevenuesinfuturetaxreturns.KRCdoesthisbyrecordingadeferredtaxliability.Illustration19-6Illustration:ReversalofTemporaryDifference,KRCInc.LO2Describeatemporarydifferencethatresultsinfuturetaxableamounts.FutureTaxableAmountsandDeferredTaxesAdeferredtaxliabilityrepresentstheincreaseintaxespayableinfutureyearsasaresultoftaxabletemporarydifferencesexistingattheendofthecurrentyear.DeferredTaxLiabilityIncometaxexpense(GAAP)Incometaxpayable(IRS)Difference$28,00016,000$12,000$28,000201136,000$(8,000)$28,000201232,000$(4,000)$84,000Total84,000$02010Illustration19-4LO2Describeatemporarydifferencethatresultsinfuturetaxableamounts.FutureTaxableAmountsandDeferredTaxesIllustration:BecauseitisthefirstyearofoperationsforKRC,thereisnodeferredtaxliabilityatthebeginningoftheyear.KRCcomputestheincometaxexpensefor2010asfollows:DeferredTaxLiabilityIllustration19-9LO2Describeatemporarydifferencethatresultsinfuturetaxableamounts.FutureTaxableAmountsandDeferredTaxesIllustration:KRCmakesthefollowingentryattheendof2010torecordincometaxes.DeferredTaxLiabilityIncomeTaxExpense 28,000 IncomeTaxPayable 16,000 DeferredTaxLiability 12,000LO2Describeatemporarydifferencethatresultsinfuturetaxableamounts.FutureTaxableAmountsandDeferredTaxesIllustration:ComputationofIncomeTaxExpensefor2011.DeferredTaxLiabilityIllustration19-10LO2Describeatemporarydifferencethatresultsinfuturetaxableamounts.FutureTaxableAmountsandDeferredTaxesIllustration:KRCmakesthefollowingentryattheendof2011torecordincometaxes.DeferredTaxLiabilityIncomeTaxExpense 28,000DeferredTaxLiability 8,000 IncomeTaxPayable 36,000LO2Describeatemporarydifferencethatresultsinfuturetaxableamounts.FutureTaxableAmountsandDeferredTaxesIllustration:Theentrytorecordincometaxesattheendof2012reducestheDeferredTaxLiabilityby$4,000.TheDeferredTaxLiabilityaccountappearsasfollowsattheendof2012.DeferredTaxLiabilityIllustration19-11E19-1:

StarfleetCorporationhasonetemporarydifferenceattheendof2010thatwillreverseandcausetaxableamountsof$55,000in2011,$60,000in2012,and$75,000in2013.Starfleet’spretaxfinancialincomefor2010is$400,000,andthetaxrateis30%forallyears.Therearenodeferredtaxesatthebeginningof2010.InstructionsComputetaxableincomeandincometaxespayablefor2010.Preparethejournalentrytorecordincometaxexpense,deferredincometaxes,andincometaxespayablefor2010.LO2Describeatemporarydifferencethatresultsinfuturetaxableamounts.FutureTaxableAmountsandDeferredTaxesLO2Describeatemporarydifferencethatresultsinfuturetaxableamounts.a.a.FutureTaxableAmountsandDeferredTaxesFutureDeductibleAmountsandDeferredTaxesIllustration:During2010,CunninghamInc.estimateditswarrantycostsrelatedtothesaleofmicrowaveovenstobe$500,000,paidevenlyoverthenexttwoyears.Forbookpurposes,in2010Cunninghamreportedwarrantyexpenseandarelatedestimatedliabilityforwarrantiesof$500,000initsfinancialstatements.Fortaxpurposes,thewarrantytaxdeductionisnotalloweduntilpaid.Illustration19-12LO3Describeatemporarydifferencethatresultsinfuturedeductibleamounts.WhenCunninghampaysthewarrantyliability,itreportsanexpense(deductibleamount)fortaxpurposes.CunninghamreportsthisfuturetaxbenefitintheDecember31,2010,balancesheetasadeferredtaxasset.Illustration19-13Illustration:ReversalofTemporaryDifference,CunninghamInc.LO3Describeatemporarydifferencethatresultsinfuturedeductibleamounts.FutureDeductibleAmountsandDeferredTaxesAdeferredtaxassetrepresentstheincreaseintaxesrefundable(orsaved)infutureyearsasaresultofdeductibletemporarydifferencesexistingattheendofthecurrentyear.DeferredTaxAssetLO3Describeatemporarydifferencethatresultsinfuturedeductibleamounts.FutureDeductibleAmountsandDeferredTaxesIllustration:HuntCo.accruesalossandarelatedliabilityof$50,000in2010forfinancialreportingpurposesbecauseofpendinglitigation.Huntcannotdeductthisamountfortaxpurposesuntiltheperioditpaystheliability,expectedin2011.DeferredTaxAssetLO3Describeatemporarydifferencethatresultsinfuturedeductibleamounts.Illustration19-14FutureDeductibleAmountsandDeferredTaxesIllustration:Assumingthat2010isHunt’sfirstyearofoperations,andincometaxpayableis$100,000,Huntcomputesitsincometaxexpenseasfollows.DeferredTaxAssetLO3Describeatemporarydifferencethatresultsinfuturedeductibleamounts.Illustration19-16FutureDeductibleAmountsandDeferredTaxesIllustration:Huntmakesthefollowingentryattheendof2010torecordincometaxes.DeferredTaxAssetIncomeTaxExpense 80,000DeferredTaxAsset 20,000 IncomeTaxPayable 100,000FutureDeductibleAmountsandDeferredTaxesLO3Describeatemporarydifferencethatresultsinfuturedeductibleamounts.Illustration:ComputationofIncomeTaxExpensefor2011.DeferredTaxAssetIllustration19-17FutureDeductibleAmountsandDeferredTaxesLO3Describeatemporarydifferencethatresultsinfuturedeductibleamounts.Illustration:Huntmakesthefollowingentryattheendof2011torecordincometaxes.DeferredTaxAssetIncomeTaxExpense 160,000 DeferredTaxAsset 20,000 IncomeTaxPayable 140,000FutureDeductibleAmountsandDeferredTaxesLO3Describeatemporarydifferencethatresultsinfuturedeductibleamounts.Illustration:Theentrytorecordincometaxesattheendof2011reducestheDeferredTaxAssetby$20,000.Illustration19-18DeferredTaxAssetFutureDeductibleAmountsandDeferredTaxesLO3Describeatemporarydifferencethatresultsinfuturedeductibleamounts.Illustration:ColumbiaCorporationhasonetemporarydifferenceattheendof2010thatwillreverseandcausedeductibleamountsof$50,000in2011,$65,000in2012,and$40,000in2013.Columbia’spretaxfinancialincomefor2010is$200,000andthetaxrateis34%forallyears.Therearenodeferredtaxesatthebeginningof2010.Columbiaexpectstobeprofitableinthefuture.InstructionsComputetaxableincomeandincometaxespayablefor2010.Preparethejournalentrytorecordincometaxexpense,deferredincometaxes,andincometaxespayablefor2010.LO3Describeatemporarydifferencethatresultsinfuturedeductibleamounts.FutureDeductibleAmountsandDeferredTaxesLO3Describeatemporarydifferencethatresultsinfuturedeductibleamounts.a.a.FutureDeductibleAmountsandDeferredTaxesDeferredTaxAsset—ValuationAllowanceAcompanyshouldreduceadeferredtaxassetbyavaluationallowance

ifitismorelikelythannot

thatitwillnotrealizesomeportionorallofthedeferredtaxasset.“Morelikelythannot”

meansaleveloflikelihoodofatleastslightlymorethan50percent.LO4Explainthepurposeofadeferredtaxassetvaluationallowance.FutureDeductibleAmountsandDeferredTaxesE19-14:CallawayCorp.hasadeferredtaxassetbalanceof$150,000attheendof2010duetoasinglecumulativetemporarydifferenceof$375,000.Attheendof2011thissametemporarydifferencehasincreasedtoacumulativeamountof$500,000.Taxableincomefor2011is$850,000.Thetaxrateis40%forallyears.Novaluationaccountisinexistenceattheendof2010.InstructionsAssumingthatitismorelikelythannotthat$30,000ofthedeferredtaxassetwillnotberealized,preparethejournalentriesrequiredfor2011.LO4Explainthepurposeofadeferredtaxassetvaluationallowance.FutureDeductibleAmountsandDeferredTaxesLO4Explainthepurposeofadeferredtaxassetvaluationallowance.FutureDeductibleAmountsandDeferredTaxesDeferredTaxAsset—ValuationAllowanceE19-14BalanceSheetPresentationLO4Explainthepurposeofadeferredtaxassetvaluationallowance.FutureDeductibleAmountsandDeferredTaxesIncometaxpayableorrefundableLO5Describethepresentationofincometaxexpenseintheincomestatement.IncomeStatementPresentationChangeindeferredincometaxIncometax

expenseorbenefit+-=Intheincomestatementorinthenotestothefinancialstatements,acompanyshoulddisclosethesignificantcomponentsofincometaxexpense(currentanddeferred).FormulatoComputeIncomeTaxExpenseIllustration19-20LO5Describethepresentationofincometaxexpenseintheincomestatement.IncomeStatementPresentationGiventhepreviousinformationrelatedtoKRCInc.,KRCreportsitsincomestatementasfollows.Illustration19-21Taxabletemporarydifferences-DeferredtaxliabilityDeductibletemporarydifferences

-DeferredtaxAssetTemporaryDifferencesSpecificDifferencesTextIllustration19-22ExamplesofTemporaryDifferencesLO6Describevarioustemporaryandpermanentdifferences.Permanentdifferencesarecausedbyitemsthat(1)enterintopretaxfinancialincomebutneverintotaxableincomeor(2)enterintotaxableincomebutneverintopretaxfinancialincome.Permanentdifferencesaffectonlytheperiodinwhichtheyoccur.Theydonotgiverisetofuturetaxableordeductibleamounts.Therearenodeferredtaxconsequencestoberecognized.TextIllustration19-24ExamplesofPermanentDifferencesSpecificDifferencesLO6Describevarioustemporaryandpermanentdifferences.Dothefollowinggenerate:FutureDeductibleAmount=DeferredTaxAssetFutureTaxableAmount=DeferredTaxLiabilityPermanentDifference1.TheMACRSdepreciationsystemisusedfortaxpurposes,andthestraight-linedepreciationmethodisusedforfinancialreportingpurposes.FutureTaxableAmount2.Alandlordcollectssomerentsinadvance.Rentsreceivedaretaxableintheperiodwhentheyarereceived.FutureDeductibleAmount3.Expensesareincurredinobtainingtax-exemptincome.PermanentDifference4.Costsofguaranteesandwarrantiesareestimatedandaccruedforfinancialreportingpurposes.FutureDeductibleAmountSpecificDifferencesLO6Describevarioustemporaryandpermanentdifferences.E19-6Dothefollowinggenerate:FutureDeductibleAmount=DeferredTaxAssetFutureTaxableAmount=DeferredTaxLiabilityPermanentDifference5.Salesofinvestmentsareaccountedforbytheaccrualmethodforfinancialreportingpurposesandtheinstallmentmethodfortaxpurposes.FutureTaxableAmount6.Proceedsarereceivedfromalifeinsurancecompanybecauseofthedeathofakeyofficer(thecompanycarriesapolicyonkeyofficers).FutureDeductibleAmount7.Estimatedlossesonpendinglawsuitsandclaimsareaccruedforbooks.Theselossesaretaxdeductibleintheperiod(s)whentherelatedliabilitiesaresettled..APermanentDifferenceSpecificDifferencesLO6Describevarioustemporaryandpermanentdifferences.E19-6PermanentDifferencesLO6Describevarioustemporaryandpermanentdifferences.E19-4:HavaciCompanyreportspretaxfinancialincomeof$80,000for2010.Thefollowingitemscausetaxableincometobedifferentthanpretaxfinancialincome.Depreciationonthetaxreturnisgreaterthandepreciationontheincomestatementby$16,000.Rentcollectedonthetaxreturnisgreaterthanrentearnedontheincomestatementby$27,000.Finesforpollutionappearasanexpenseof$11,000ontheincomestatement.Havaci’staxrateis30%forallyears,andthecompanyexpectstoreporttaxableincomeinallfutureyears.Therearenodeferredtaxesatthebeginningof2010.PermanentDifferencesLO6Describevarioustemporaryandpermanentdifferences.Acompanymustconsiderpresentlyenactedchangesinthetaxratethatbecomeeffectiveforaparticularfutureyear(s)whendeterminingthetaxratetoapplytoexistingtemporarydifferences.RevisionofFutureTaxRatesWhenachangeinthetaxrateisenacted,companiesshouldrecorditseffectontheexistingdeferredincometaxaccountsimmediately.TaxRateConsiderationsSpecificDifferencesLO7Explaintheeffectofvarioustaxratesandtaxratechangesondeferredincometaxes.Netoperatingloss(NOL)

=tax-deductibleexpensesexceedtaxablerevenues.Thefederaltaxlawspermittaxpayerstousethelossesofoneyeartooffsettheprofitsofotheryears(carryback

andcarryforward).AccountingforNetOperatingLossesLO8Applyaccountingproceduresforalosscarrybackandalosscarryforward.LossCarrybackAccountingforNetOperatingLossesLO8Applyaccountingproceduresforalosscarrybackandalosscarryforward.Back2yearsandforward20yearsLossesmustbeappliedtoearliestyearfirstIllustration19-29LossCarryforwardMayelecttoforgolosscarrybackandCarryforwardlosses20yearsAccountingforNetOperatingLossesLO8Applyaccountingproceduresforalosscarrybackandalosscarryforward.Illustration19-30BE19-12:

(Carryback)

ConlinCorporationhadthefollowingtaxinformation.AccountingforNetOperatingLossesLO8Applyaccountingproceduresforalosscarrybackandalosscarryforward.In2011Conlinsufferedanetoperatinglossof$480,000,whichitelectedtocarryback.The2011enactedtaxrateis29%.PrepareValis’sentrytorecordtheeffectofthelosscarryback.AccountingforNetOperatingLosses$144,000LO8Applyaccountingproceduresforalosscarrybackandalosscarryforward.E19-12:JournalEntryfor2011AccountingforNetOperatingLossesLO8Applyaccountingproceduresforalosscarrybackandalosscarryforward.Incometaxrefundreceivable 144,000 Benefitduetolosscarryback 144,000AccountingforNetOperatingLossesLO8Applyaccountingproceduresforalosscarrybackandalosscarryforward.BE19-13:RodeInc.incurredanetoperatinglossof$500,000in2010.Combinedincomefor2008and2009was$350,000.Thetaxrateforallyearsis40%.Rodeelectsthecarrybackoption.Preparethejournalentriestorecordthebenefitsofthelosscarrybackandthelosscarryforward.AccountingforNetOperatingLossesLO8Applyaccountingproceduresforalosscarrybackandalosscarryforward.E19-13:JournalEntriesfor2010AccountingforNetOperatingLossesLO8Applyaccountingproceduresforalosscarrybackandalosscarryforward.Incometaxrefundreceivable 140,000 Benefitduetolosscarryback 140,000Deferredtaxasset 60,000 Benefitduetolosscarryforward 60,000BE19-14

(CarrybackandCarryforwardwithValuationAllowance):

UsetheinformationforRodeInc.giveninBE19-13.Assumethatitismorelikelythannotthattheentirenetoperatinglosscarryforwardwillnotberealizedinfutureyears.Prepareallthejournalentriesnecessaryattheendof2010.AccountingforNetOperatingLossesLO8Applyaccountingproceduresforalosscarrybackandalosscarryforward.E19-14:JournalEntriesfor2010AccountingforNetOperatingLossesLO8Applyaccountingproceduresforalosscarrybackandalosscarryforward.Whetherthecompanywillrealizeadeferredtaxassetdependsonwhethersufficienttaxableincomeexistsorwillexistwithinthecarryforwardperiod.ValuationAllowanceRevisitedLO8Applyaccountingproceduresforalosscarrybackandalosscarryforward.TextIllustration19-37PossibleSourcesofTaxableIncomeIfanyoneofthesesourcesissufficienttosupportaconclusionthatavaluationallowanceisunnecessary,acompanyneednotconsiderothersources.TextIllustration19-38EvidencetoConsiderinEvaluatingtheneedforaValuationAccountBalanceSheetPresentationFinancialStatementPresentationLO9Describethepresentationofdeferredincometaxesinfinancialstatements.Anindividualdeferredtaxliabilityorassetisclassifiedascurrentornoncurrentbasedontheclassificationoftherelatedassetorliabilityforfinancialreportingpurposes.Companiesshouldclassifydeferredtaxaccountsonthebalancesheetintwocategories:oneforthenetcurrentamount,andoneforthenetnoncurrentamount.IncomeStatementPresentationFinancialStatementPresentationLO9Describethepresentationofdeferredincometaxesinfinancialstatements.Companiesshouldallocateincometaxexpense(orbenefit)tocontinuingoperations,discontinuedoperations,extraordinaryitems,andpriorperiodadjustments.Companiesshoulddisclosethesignificantcomponentsofincometaxexpenseattributabletocontinuingoperations(currenttaxexpense,deferredtaxexpense,etc.).ReviewoftheAsset-LiabilityMethodCompaniesapplythefollowingbasicprinciples:

Recognizeacurrenttaxliabilityorassetfortheestimatedtaxespayableorrefundable.Recognizeadeferredtaxliabilityorassetfortheestimatedfuturetaxeffectsattributabletotemporarydifferencesandcarryforwardsusingenactedtaxrate.Basethemeasurementofcurrentanddeferredtaxesonprovisionsoftheenactedtaxlaw.Reducethemeasurementofdeferredtaxassets,ifnecessary,bytheamountofanytaxbenefitsthat,companiesdonotexpecttorealize.LO10Indicatethebasicprinciplesoftheasset-liabilitymethod.ReviewoftheAsset-LiabilityMethodLO10Indicatethebasicprinciplesoftheasset-liabilitymethod.Illustration19-43ProceduresforComputingandReportingDeferredIncomeTaxesTheclassificationofdeferredtaxesunderiGAAPisalwaysnoncurrent.UnderiGAAP,anaffirmativejudgmentapproachisused,bywhichadeferredtaxassetisrecognizeduptotheamountthatisprobabletoberealized.U.S.GAAPusesanimpairmentapproach.iGAAPusestheenactedtaxrateorsubstantiallyenactedtaxrate.(“Substantiallyenacted”meansvirtuallycertain.)ForU.S.GAAP,theenactedtaxratemustbeused.ThetaxeffectsrelatedtocertainitemsarereportedinequityunderiGAAP.ThatisnotthecaseunderU.S.GAAP,whichchargesorcreditsthetaxeffectstoincome.U.S.GAAPrequirescompaniestoassessthelikelihoodofuncertaintaxpositionsbeingsustainableuponaudit.Potentialliabilitiesmustbeaccruedanddisclosedifthepositionis“morelikelythannot”tobedisallowed.UnderiGAAP,allpotentialliabilitiesmustberecognized.Withrespecttomeasurement,iGAAPusesanexpected-valueapproachtomeasurethetaxliability,whichdiffersfromU.S.GAAP.FiscalYear-2009AllmanCompany,whichbeganoperationsatthebeginningof2009,producesvariousproductsonacontractbasis.Eachcontractgeneratesagrossprofitof$80,000.SomeofAllman’scontractsprovideforthecustomertopayonaninstallmentbasis.Underthesecontracts,Allmancollectsone-fifthofthecontractrevenueineachofthefollowingfouryears.Forfinancialreportingpurposes,thecompanyrecognizesgrossprofitintheyearofcompletion(accrualbasis);fortaxpurposes,Allmanrecognizesgrossprofitintheyearcashiscollected(installmentbasis).LO11Understandandapplytheconceptsandproceduresofinterperiodtaxallocation.FiscalYear-2009PresentedbelowisinformationrelatedtoAllman’soperationsfor2009.In2009,thecompanycompletedsevencontractsthatallowforthecustomertopayonaninstallmentbasis.Allmanrecognizedtherelatedgrossprofitof$560,000forfinancialreportingpurposes.Itreportedonly$112,000ofgrossprofitoninstallmentsalesonthe2009taxreturn.Thecompanyexpectsfuturecollectionsontherelatedinstallmentreceivablestoresultintaxableamountsof$112,000ineachofthenextfouryears.Atthebeginningof2009,AllmanCompanypurchaseddepreciableassetswithacostof$540,000.Forfi