1. COMPUTING INCOME TAX EXPENSE A SIX STEP PROGRAM

2. STEP 1 IDENTIFY TEMPORARY DIFFERENCES IDENTIFY PERMANENT DIFFERENCES

3. STEP 2 COMPUTE TAXES PAYABLE –DETERMINE GAAP BASED INCOME BEFORE TAXES –ADD/SUBTRACT PERMANENT DIFFERENCES –ADD/SUBTRACT NET ORIGINATING AND/OR REVERSING TEMPORARY DIFFERENCES FOR THE CURRENT PERIOD APPLY APPROPRIATE RATE/CREDITS TAXES PAYABLE=CURRENT PORTION

4. STEP 3 QUANTIFY UNREVERSED TEMPORARY DIFFERENCES –COMPUTE BOOK VALUE OF RELATED ASSETS/LIABILITIES –COMPUTE TAX BASIS OF RELATED ASSETS/LIABILITIES –SUBTRACT TAX BASIS FROM BOOK VALUE

5. STEP 4 CLASSIFY REVERSING DIFFERENCES –TAXABLE WHEN REVERSED-TAXABLE INCOME IS GREATER THAN GAAP INCOME –DEDUCTIBLE WHEN REVERSED-TAXABLE INCOME IS LESS THAN GAAP INCOME DETERMINE BALANCE SHEET CLASSIFICATION

6. STEP 5 COMPUTE INCOME TAX EFFECT OF REVERSING DIFFERENCE –USE ENACTED TAX RATES –TAXABLE DIFFERENCES CREATE DEFERRED TAX LIABILITIES –DEDUCTIBLE DIFFERENCES CREATE DEFERRED TAX ASSETS CONSIDER NEED FOR VALUATION ALLOWANCE APPLY “MORE LIKELY THAN NOT” TEST

7. STEP 6 PREPARE ADJUSTING JOURNAL ENTRY –RECORD INCREASE/DECREASE IN DEFERRED TAX ASSETS/LIABILITIES –RECORD DEFERRED TAX EXPENSE (PLUG) –RECORD CURRENT TAX EXPENSE (TAXES PAYABLE)