19 Accounting for Income Taxes PROBLEMS 19
PROBLEMS
P19-1 (L01,2,4) EXCEL (Three Differences, No Beginning Deferred Taxes, Multiple Rates) The following information is available for Remmers Corporation for 2017.
1. Depreciation reported on the tax return exceeded depreciation reported on the income statement by $120,000. This difference will reverse in equal amounts of $30,000 over the years 2018–2021.
2. Interest received on municipal bonds was $10,000.
3. Rent collected in advance on January 1, 2017, totaled $60,000 for a 3-year period. Of this amount, $40,000 was reported as unearned at December 31, 2017, for book purposes.
4. The tax rates are 40% for 2017 and 35% for 2018 and subsequent years.
5. Income taxes of $320,000 are due per the tax return for 2017.
6. No deferred taxes existed at the beginning of 2017.
Instructions
(a) Compute taxable income for 2017.
(b) Compute pretax financial income for 2017.
(c) Prepare the journal entries to record income tax expense, deferred income taxes, and income taxes payable for 2017 and 2018. Assume taxable income was $980,000 in 2018.
(d) Prepare the income tax expense section of the income statement for 2017, beginning with “Income before income taxes.”
P19-2 (L01,2) (One Temporary Difference, Tracked for 4 Years, One Permanent Difference, Change in Rate) The pretax financial income of Truttman Company differs from its taxable income throughout each of 4 years as follows...
Instructions
(a) Prepare journal entries to record income taxes in all 4 years. Assume that the change in the tax rate to 40% was not enacted until the beginning of 2018.
(b) Prepare the income statement for 2018, beginning with Income before income taxes.
P19-3 (LO1,2,4) (Second Year of Depreciation Difference, Two Differences, Single Rate, Discontinued Operation) The following information has been obtained for Gocker Corporation.
1. Prior to 2017, taxable income and pretax financial income were identical.
2. Pretax financial income is $1,700,000 in 2017 and $1,400,000 in 2018.
3. On January 1, 2017, equipment costing $1,200,000 is purchased. It is to be depreciated on a straight-line basis over 5 years for tax purposes and over 8 years for financial reporting purposes. (Hint: Use the half-year convention for tax purposes, as discussed in Appendix 11A.)
4. Interest of $60,000 was earned on tax-exempt municipal obligations in 2018.
5. Included in 2018 pretax financial income is a gain on discontinued operations of $200,000, which is fully taxable.
6. The tax rate is 35% for all periods.
7. Taxable income is expected in all future years.
Instructions
(a) Compute taxable income and income taxes payable for 2018.
(b) Prepare the journal entry to record 2018 income tax expense, income taxes payable, and deferred taxes.
(c) Prepare the bottom portion of Gocker’s 2018 income statement, beginning with “Income from continuing operations before income taxes.”
(d) Indicate how deferred income taxes should be presented on the December 31, 2018, balance sheet.
P19-4 (LO1,2,4) (Permanent and Temporary Differences, One Rate) The accounting records of Shinault Inc. show the following data for 2017 (its first year of operations).
1. Life insurance expense on officers was $9,000.
2. Equipment was acquired in early January for $300,000. Straight-line depreciation over a 5-year life is used, with no salvage value. For tax purposes, Shinault used a 30% rate to calculate depreciation.
3. Interest revenue on State of New York bonds totaled $4,000.
4. Product warranties were estimated to be $50,000 in 2017. Actual repair and labor costs related to the warranties in 2017 were $10,000. The remainder is estimated to be paid evenly in 2018 and 2019.
5. Gross profit on an accrual basis was $100,000. For tax purposes, $75,000 was recorded on the installment-sales method.
6. Fines incurred for pollution violations were $4,200.
7. Pretax financial income was $750,000. The tax rate is 30%.
Instructions
(a) Prepare a schedule starting with pretax financial income in 2017 and ending with taxable income in 2017.
(b) Prepare the journal entry for 2017 to record income taxes payable, income tax expense, and deferred income taxes.
P19-5 (LO3) EXCEL GROUPWORK (NOL without Valuation Account) Jennings Inc. reported the following pretax income (loss) and related tax rates during the years 2013–2019…
Instructions
(a) Prepare the journal entries for the years 2017–2019 to record income taxes payable (refundable), income tax expense
(benefit), and the tax effects of the loss carryback and carryforward. Assume that Jennings elects the carryback provision where possible and expects to realize the benefits of any loss carryforward in the year that immediately follows the loss year.
(b) Indicate the effect the 2017 entry(ies) has on the December 31, 2017, balance sheet.
(c) Prepare the portion of the income statement, starting with “Operating loss before income taxes,” for 2017.
(d) Prepare the portion of the income statement, starting with “Income before income taxes,” for 2018.
P19-6 (L01,4) (Two Differences, Two Rates, Future Income Expected) Presented below are two independent situations related to future taxable and deductible amounts resulting from temporary differences existing at December 31, 2017…
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.
P19-7 (LO1,2,4) GROUPWORK (One Temporary Difference, Tracked 3 Years, Change in Rates, Income Statement
Presentation) Crosley Corp. sold an investment on an installment basis. The total gain of $60,000 was reported for financial reporting purposes in the period of sale. The company qualifies to use the installment-sales method for tax purposes. The installment period is 3 years; one-third of the sale price is collected in the period of sale. The tax rate was 40% in 2017, and 35% in 2018 and 2019. The 35% tax rate was not enacted in law until 2018. The accounting and tax data for the 3 years is shown below...
Instructions
(a) Prepare the journal entries to record the income tax expense, deferred income taxes, and the income taxes payable at the end of each year. No deferred income taxes existed at the beginning of 2017.
(b) Explain how the deferred taxes will appear on the balance sheet at the end of each year.
(c) Draft the income tax expense section of the income statement for each year, beginning with “Income before income taxes.”
P19-8 (LO1,2,4) (Two Differences, 2 Years, Compute Taxable Income and Pretax Financial Income) The following information was disclosed during the audit of Elbert Inc….
Instructions
(a) Determine the amount to report for deferred income taxes at the end of 2017, and indicate how it should be classified on the balance sheet.
(b) Prepare the journal entry to record income taxes for 2017.
(c) Draft the income tax section of the income statement for 2017, beginning with “Income before income taxes.” (Hint: You must compute taxable income and then combine that with changes in cumulative temporary differences to arrive at pretax financial income.)
(d) Determine the deferred income taxes at the end of 2018, and indicate how they should be classified on the balance sheet.
(e) Prepare the journal entry to record income taxes for 2018.
(f) Draft the income tax section of the income statement for 2018, beginning with “Income before income taxes.”
P19-9 (LO1,2,4) GROUPWORK (Five Differences, Compute Taxable Income and Deferred Taxes, Draft Income Statement) Wise Company began operations at the beginning of 2018. The following information pertains to this company.
1. Pretax financial income for 2018 is $100,000.
2. The tax rate enacted for 2018 and future years is 40%.
3. Differences between the 2018 income statement and tax return are listed below:
(a) Warranty expense accrued for financial reporting purposes amounts to $7,000. Warranty deductions per the tax return amount to $2,000.
(b) Gross profit on construction contracts using the percentage-of-completion method per books amounts to $92,000.
Gross profit on construction contracts for tax purposes amounts to $67,000.
(c) Depreciation of property, plant, and equipment for financial reporting purposes amounts to $60,000. Depreciation of these assets amounts to $80,000 for the tax return.
(d) A $3,500 fine paid for violation of pollution laws was deducted in computing pretax financial income.
(e) Interest revenue recognized on an investment in tax-exempt municipal bonds amounts to $1,500.
4. Taxable income is expected for the next few years. (Assume (a) is short-term in nature; assume (b) and (c) are long-term in nature.)
Instructions
(a) Compute taxable income for 2018.
(b) Compute the deferred taxes at December 31, 2018, that relate to the temporary differences described above. Clearly label them as deferred tax asset or liability.
(c) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2018.
(d) Draft the income tax expense section of the income statement, beginning with “Income before income taxes.”
