19 Accounting for Income Taxes EXERCISES 19.1
EXERCISES
E19-1 (L01,2) EXCEL (One Temporary Difference, Future Taxable Amounts, One Rate, No Beginning Deferred Taxes)
South Carolina Corporation has one temporary difference at the end of 2017 that will reverse and cause taxable amounts of $55,000 in 2018, $60,000 in 2019, and $65,000 in 2020. South Carolina’s pretax financial income for 2017 is $300,000, and the tax rate is 30% for all years. There are no deferred taxes at the beginning of 2017.
Instructions
(a) Compute taxable income and income taxes payable for 2017.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017.
(c) Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income taxes.”
E19-2 (L01,2) (Two Differences, No Beginning Deferred Taxes, Tracked through 2 Years) The following information is available for Wenger Corporation for 2016 (its first year of operations).
1. Excess of tax depreciation over book depreciation, $40,000. This $40,000 difference will reverse equally over the years 2017–2020.
2. Deferral, for book purposes, of $20,000 of rent received in advance. The rent will be recognized in 2017.
3. Pretax financial income, $300,000.
4. Tax rate for all years, 40%.
Instructions
(a) Compute taxable income for 2016.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016.
(c) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming taxable income of $325,000.
E19-3 (L01,2) EXCEL (One Temporary Difference, Future Taxable Amounts, One Rate, Beginning Deferred Taxes) Bandung Corporation began 2017 with a $92,000 balance in the Deferred Tax Liability account. At the end of 2017, the related cumulative temporary difference amounts to $350,000, and it will reverse evenly over the next 2 years. Pretax accounting income for 2017 is $525,000, the tax rate for all years is 40%, and taxable income for 2017 is $405,000.
Instructions
(a) Compute income taxes payable for 2017.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017.
(c) Prepare the income tax expense section of the income statement for 2017 beginning with the line “Income before income taxes.”
E19-4 (L01,2) (Three Differences, Compute Taxable Income, Entry for Taxes) Zurich Company reports pretax financial income of $70,000 for 2017. The following items cause taxable income to be different than pretax financial income.
1. Depreciation on the tax return is greater than depreciation on the income statement by $16,000.
2. Rent collected on the tax return is greater than rent recognized on the income statement by $22,000.
3. Fines for pollution appear as an expense of $11,000 on the income statement.
Zurich’s tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2017.
Instructions
(a) Compute taxable income and income taxes payable for 2017.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017.
(c) Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income taxes.”
(d) Compute the effective income tax rate for 2017.
E19-5 (L01,2) (Two Temporary Differences, One Rate, Beginning Deferred Taxes) The following facts relate to Krung
Thep Corporation.
1. Deferred tax liability, January 1, 2017, $40,000.
2. Deferred tax asset, January 1, 2017, $0.
3. Taxable income for 2017, $95,000.
4. Pretax financial income for 2017, $200,000.
5. Cumulative temporary difference at December 31, 2017, giving rise to future taxable amounts, $240,000.
6. Cumulative temporary difference at December 31, 2017, giving rise to future deductible amounts, $35,000.
7. Tax rate for all years, 40%.
8. The company is expected to operate profitably in the future.
Instructions
(a) Compute income taxes payable for 2017.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017.
(c) Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income taxes.”
E19-6 (L01,2) (Identify Temporary or Permanent Differences) Listed below are items that are commonly accounted for differently for financial reporting purposes than they are for tax purposes.
Instructions
For each item below, indicate whether it involves:
(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
(3) A permanent difference.
Use the appropriate number to indicate your answer for each.
(a) ______ The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes for some plant assets.
(b) ______ A landlord collects some rents in advance. Rents received are taxable in the period when they are received.
(c) ______ Expenses are incurred in obtaining tax-exempt income.
(d) ______ Costs of guarantees and warranties are estimated and accrued for financial reporting purposes.
(e) ______ Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes.
(f) ______ For some assets, straight-line depreciation is used for both financial reporting purposes and tax purposes, but the assets’ lives are shorter for tax purposes.
(g) ______ Interest is received on an investment in tax-exempt municipal obligations.
(h) ______ Proceeds are received from a life insurance company because of the death of a key officer. (The company carries a policy on key officers.)
(i) ______ The tax return reports a deduction for 80% of the dividends received from U.S. corporations. The cost method is used in accounting for the related investments for financial reporting purposes.
(j) ______ Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled.
(k) ______ Expenses on stock options are accrued for financial reporting purposes.
E19-7 (L01,2) (Terminology, Relationships, Computations, Entries)
Instructions
Complete the following statements by filling in the blanks.
(a) In a period in which a taxable temporary difference reverses, the reversal will cause taxable income to be _______ (less than, greater than) pretax financial income.
(b) If a $76,000 balance in Deferred Tax Asset was computed by use of a 40% rate, the underlying cumulative temporary difference amounts to $_______.
(c) Deferred taxes ________ (are, are not) recorded to account for permanent differences.
(d) If a taxable temporary difference originates in 2017, it will cause taxable income for 2017 to be ________ (less than, greater than) pretax financial income for 2017.
(e) If total tax expense is $50,000 and deferred tax expense is $65,000, then the current portion of the expense computation is referred to as current tax _______ (expense, benefit) of $_______.
(f) If a corporation’s tax return shows taxable income of $100,000 for Year 2 and a tax rate of 40%, how much will appear on the December 31, Year 2, balance sheet for “Income taxes payable” if the company has made estimated tax payments of $36,500 for Year 2? $________.
(g) An increase in the Deferred Tax Liability account on the balance sheet is recorded by a _______ (debit, credit) to the Income Tax Expense account.
(h) An income statement that reports current tax expense of $82,000 and deferred tax benefit of $23,000 will report total income tax expense of $________.
(i) A valuation account is needed whenever it is judged to be _______ that a portion of a deferred tax asset _______ (will be, will not be) realized.
(j) If the tax return shows total taxes due for the period of $75,000 but the income statement shows total income tax expense of $55,000, the difference of $20,000 is referred to as deferred tax _______ (expense, benefit).
E19-8 (L01,2) (Two Temporary Differences, One Rate, 3 Years) Button Company has the following two temporary differences between its income tax expense and income taxes payable...
Instructions
(a) Assuming there were no temporary differences prior to 2017, prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017, 2018, and 2019.
(b) Indicate how deferred taxes will be reported on the 2019 balance sheet. Button’s product warranty is for 12 months.
(c) Prepare the income tax expense section of the income statement for 2019, beginning with the line “Pretax financial income.”
E19-9 (L04) (Three Differences, Classify Deferred Taxes) At December 31, 2016, Belmont Company had a net deferred tax liability of $375,000. An explanation of the items that compose this balance is as follows...
Instructions
Indicate the manner in which deferred taxes should be presented on Belmont Company’s December 31, 2016, balance sheet.
E19-10 (L01,2) (Two Temporary Differences, One Rate, Beginning Deferred Taxes, Compute Pretax Financial Income) The following facts relate to Duncan Corporation.
1. Deferred tax liability, January 1, 2017, $60,000.
2. Deferred tax asset, January 1, 2017, $20,000.
3. Taxable income for 2017, $105,000.
4. Cumulative temporary difference at December 31, 2017, giving rise to future taxable amounts, $230,000.
5. Cumulative temporary difference at December 31, 2017, giving rise to future deductible amounts, $95,000.
6. Tax rate for all years, 40%. No permanent differences exist.
7. The company is expected to operate profitably in the future.
Instructions
(a) Compute the amount of pretax financial income for 2017.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017.
(c) Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income taxes.”
(d) Compute the effective tax rate for 2017.
E19-11 (L01,2) (One Difference, Multiple Rates, Effect of Beginning Balance versus No Beginning Deferred Taxes) At the end of 2016, Lucretia McEvil Company has $180,000 of cumulative temporary differences that will result in reporting the following future taxable amounts…
Instructions
(a) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2016, assuming that there were no deferred taxes at the end of 2015.
(b) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2016, assuming that there was a balance of $22,000 in a Deferred Tax Liability account at the end of 2015.
E19-12 (L01,2) (Deferred Tax Asset with and without Valuation Account) Jennifer Capriati Corp. has a deferred tax asset account with a balance of $150,000 at the end of 2016 due to a single cumulative temporary difference of $375,000. At the end of 2017, this same temporary difference has increased to a cumulative amount of $450,000. Taxable income for 2017 is $820,000. The tax rate is 40% for all years. No valuation account related to the deferred tax asset is in existence at the end of 2016.
Instructions
(a) Record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming that it is more likely than not that the deferred tax asset will be realized.
(b) Assuming that it is more likely than not that $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2017 to record the valuation account.
E19-13 (L01,2) (Deferred Tax Asset with Previous Valuation Account) Assume the same information as E19-12, except that at the end of 2016, Jennifer Capriati Corp. had a valuation account related to its deferred tax asset of $45,000.
Instructions
(a) Record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming that it is more likely than not that the deferred tax asset will be realized in full.
(b) Record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming that it is more likely than not that none of the deferred tax asset will be realized.
E19-14 (L01,2,3,4) (Deferred Tax Liability, Change in Tax Rate, Prepare Section of Income Statement) Novotna Inc.’s only temporary difference at the beginning and end of 2016 is caused by a $3 million deferred gain for tax purposes for an installment sale of a plant asset, and the related receivable (only one-half of which is classified as a current asset) is due in equal installments in 2017 and 2018. The related deferred tax liability at the beginning of the year is $1,200,000. In the third quarter of 2016, a new tax rate of 34% is enacted into law and is scheduled to become effective for 2018. Taxable income for 2016 is $5,000,000, and taxable income is expected in all future years.
Instructions
(a) Determine the amount reported as a deferred tax liability at the end of 2016. Indicate proper classification(s).
(b) Prepare the journal entry (if any) necessary to adjust the deferred tax liability when the new tax rate is enacted into law.
(c) Draft the income tax expense portion of the income statement for 2016. Begin with the line “Income before income taxes.” Assume no permanent differences exist.
E19-15 (L01,2) (Two Temporary Differences, Tracked through 3 Years, Multiple Rates) Taxable income and pretax financial income would be identical for Huber Co. except for its treatments of gross profit on installment sales and estimated costs of warranties. The following income computations have been prepared…
Instructions
Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016, 2017, and 2018.
E19-16 (L01,2) (Three Differences, Multiple Rates, Future Taxable Income) During 2017, Kate Holmes Co.’s first year of operations, the company reports pretax financial income at $250,000. Holmes’s enacted tax rate is 45% for 2017 and 40% for all later years. Holmes expects to have taxable income in each of the next 5 years. The effects on future tax returns of temporary differences existing at December 31, 2017, are summarized as follows...
Instructions
(a) Complete the schedule below to compute deferred taxes at December 31, 2017.
(b) Compute taxable income for 2017.
(c) Prepare the journal entry to record income taxes payable, deferred taxes, and income tax expense for 2017.
E19-17 (L01,2) (Two Differences, One Rate, Beginning Deferred Balance, Compute Pretax Financial Income) Andy
McDowell Co. establishes a $100 million liability at the end of 2017 for the estimated site-cleanup costs at two of its manufacturing facilities. All related closing costs will be paid and deducted on the tax return in 2018. Also, at the end of 2017, the company has $50 million of temporary differences due to excess depreciation for tax purposes, $7 million of which will reverse in 2018.
The enacted tax rate for all years is 40%, and the company pays taxes of $64 million on $160 million of taxable income in 2017. McDowell expects to have taxable income in 2018.
Instructions
(a) Determine the deferred taxes to be reported at the end of 2017.
(b) Indicate how the deferred taxes computed in (a) are to be reported on the balance sheet.
(c) Assuming that the only deferred tax account at the beginning of 2017 was a deferred tax liability of $10,000,000, draft the income tax expense portion of the income statement for 2017, beginning with the line “Income before income taxes.” (Hint: You must first compute (1) the amount of temporary difference underlying the beginning $10,000,000 deferred tax liability, then (2) the amount of temporary differences originating or reversing during the year, and then (3) the amount of pretax financial income.)
E19-18 (L01,2) (Two Differences, No Beginning Deferred Taxes, Multiple Rates) Teri Hatcher Inc., in its first year of operations, has the following differences between the book basis and tax basis of its assets and liabilities at the end of 2016…
It is estimated that the warranty liability will be settled in 2017. The difference in equipment (net) will result in taxable amounts of $20,000 in 2017, $30,000 in 2018, and $10,000 in 2019. The company has taxable income of $520,000 in 2016. As of the beginning of 2016, the enacted tax rate is 34% for 2016–2018, and 30% for 2019. Hatcher expects to report taxable income through 2019.
Instructions
(a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016.
(b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2016.
E19-19 (L01,2,4) (Two Temporary Differences, Multiple Rates, Future Taxable Income) Nadal Inc. has two temporary differences at the end of 2016. The first difference stems from installment sales, and the second one results from the accrual of a loss contingency. Nadal’s accounting department has developed a schedule of future taxable and deductible amounts related to these temporary differences as follows...
Instructions
(a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016.
(b) Indicate how deferred income taxes would be classified on the balance sheet at the end of 2016.
E19-20 (L01,2,4) (Two Differences, One Rate, First Year) The differences between the book basis and tax basis of the assets and liabilities of Castle Corporation at the end of 2016 are presented below...
Instructions
(a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016.
(b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2016.
