Chapter 16, Problem 7CPA

To determine

Intra period tax allocation

Every business firm report their income from continuing operation and discontinued operation separately in financial statement for better understanding about the operation of business. So, for the tax purpose, a business should divide the total income tax expense for a reporting period between continuing and discontinued operations. A gain from discontinued operation increase the taxable income while loss from discontinued reduce the taxable income and produce a tax benefit.

Intra period tax allocation refers to allocation of tax expenses between income from continued operation and income (loss) from discontinued operation. The following items should be reported net of their respective income tax effects:

• Income (or loss) from ordinary, continuing operations.

• Discontinued operations.

Temporary Difference

Temporary difference refers to the difference of one income recognized by the tax rules and accounting rules of a company in different periods. Consequently, the difference between the amount of assets and liabilities reported in the financial reports and the amount of assets and liabilities as per the company’s tax records, is known as temporary difference. For example, different amount of depreciation according to accounting basis and taxation rule.

Permanent Difference

Permanent difference refers to the difference of amount caused by those transactions or events which will never affect taxable income or taxable payable under the existing tax law. For example, interest income from the investment in bonds issued by state or municipal government is exempted from tax, so the difference created between accounting income and taxable income due to this interest is termed as permanent difference. This situation will not reverse in later years.

To identify: an example of intra period income tax allocation.