101. In its 2018 income statement, Cohen Corp. reported depreciation of $3,700,000 and interest revenue on municipal obligations of $700,000. Cohen reported depreciation of $5,500,000 on its 2018 income tax return. The difference in depreciation is the only temporary difference, and it will reverse equally over the next three years. Cohen's enacted income tax rates are 35% for 2018, 30% for 2019, and 25% for 2020 and 2021. What amount should be included in the deferred income tax liability in Hertz's December 31, 2018 balance sheet?
a. $480,000
b. $620,000
c. $750,000
d. $875,000
102. Dunn, Inc. uses the accrual method of accounting for financial reporting purposes and appropriately uses the installment method of accounting for income tax purposes. Installment income of $3,000,000 will be collected in the following years when the enacted tax rates are:
Collection of Income Enacted Tax Rates
2017 $300,000 35%
2018 600,000 30%
2019 900,000 30%
2020 1,200,000 25%
The installment income is Dunn's only temporary difference. What amount should be included in the deferred income tax liability in Dunn's December 31, 2018 balance sheet?
a. $750,000
b. $855,000
c. $945,000
d. $1,050,000
103. For calendar year 2018, Kane Corp. reported depreciation of $1,600,000 in its income statement. On its 2018 income tax return, Kane reported depreciation of $2,400,000. Kane's income statement also included $300,000 accrued warranty expense that will be deducted for tax purposes when paid. Kane's enacted tax rates are 30% for 2018 and 2019, and 24% for 2020 and 2021. The depreciation difference and warranty expense will reverse over the next three years as follows:
Depreciation Difference Warranty Expense
2019 $320,000 $ 60,000
2020 280,000 100,000
2021 200,000 140,000
$800,000 $300,000
These were Kane's only temporary differences. In Kane's 2018 income statement, the deferred portion of its provision for income taxes should be
a. $267,600.
b. $150,000.
c. $135,600.
d. $146,400.
104. Wright Co., organized on January 2, 2018, had pretax accounting income of $960,000 and taxable income of $3,120,000 for the year ended December 31, 2018. The only temporary difference is accrued product warranty costs which are expected to be paid as follows:
2019 $720,000
2020 360,000
2021 360,000
2022 720,000
The enacted income tax rates are 35% for 2018, 30% for 2019 through 2021, and 25% for 2022. If Wright expects taxable income in future years, the deferred tax asset in Wright's December 31, 2018 balance sheet should be
a. $432,000.
b. $504,000.
c. $612,000.
d. $756,000.
BRIEF EXERCISES
BE. 19-105—Computation of taxable income.
The records for Bosch Co. show this data for 2018:
• Gross profit on installment sales recorded on the books was $480,000. Gross profit from collections of installment receivables was $320,000.
• Life insurance on officers was $3,800.
• Machinery was acquired in January for $300,000. Straight-line depreciation over a ten-year life (no salvage value) is used. For tax purposes, MACRS depreciation is used and Bosch may deduct 14% for 2018.
• Interest received on tax exempt Iowa State bonds was $9,000.
• The estimated warranty liability related to 2018 sales was $21,600. Repair costs under warranties during 2018 were $13,600. The remainder will be incurred in 2019.
• Pretax financial income is $700,000. The tax rate is 30%.
•
Instructions
(a) Prepare a schedule starting with pretax financial income and compute taxable income.
(b) Prepare the journal entry to record income taxes for 2018.
BE. 19-106—Future taxable and deductible amounts.
Define temporary differences, future taxable amounts, and future deductible amounts.
BE. 19-107—Deferred income taxes.
Pole Co. at the end of 2018, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:
Pretax financial income $ 520,000
Extra depreciation taken for tax purposes (1,200,000)
Estimated expenses deductible for taxes when paid 890,000
Taxable income $ 210,000
Use of the depreciable assets will result in taxable amounts of $400,000 in each of the next three years. The estimated litigation expenses of $890,000 will be deductible in 2021 when settlement is expected.
Instructions
(a) Prepare a schedule of future taxable and deductible amounts.
(b) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2018, assuming a tax rate of 40% for all years.
EXERCISES
Ex. 19-108—Deferred income taxes.
Hunt Co. at the end of 2018, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:
Pretax financial income $ 950,000
Estimated warranty expenses deductible for taxes when paid 1,200,000
Extra depreciation (1, 950,000)
Taxable income $ 200,000
Estimated warranty expense of $800,000 will be deductible in 2019, $300,000 in 2020, and $100,000 in 2021. The use of the depreciable assets will result in taxable amounts of $650,000 in each of the next three years.
Instructions
(a) Prepare a table of future taxable and deductible amounts.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2018, assuming an income tax rate of 40% for all years.
Ex. 19-109—Recognition of deferred tax asset.
(a) Describe a deferred tax asset.
(b) When should a deferred tax asset be reduced by a valuation allowance?
Ex. 19-110—Permanent and temporary differences.
Listed below are items that are treated differently for accounting purposes than they are for tax purposes. Indicate whether the items are permanent differences or temporary differences. For temporary differences, indicate whether they will create deferred tax assets or deferred tax liabilities.
1. Investments accounted for by the equity method (ignore dividends received deduction).
2. Advance rental receipts.
3. Fine for polluting.
4. Estimated future warranty costs.
5. Excess of contributions over pension expense.
6. Expenses incurred in obtaining tax-exempt revenue.
7. Installment sales.
8. Excess tax depreciation over accounting depreciation.
9. Long-term construction contracts.
10. Premiums paid on life insurance of officers (company is the beneficiary).
Ex. 19-111—Permanent and temporary differences.
Indicate and explain whether each of the following independent situations should be treated as a temporary difference or a permanent difference.
(a) For accounting purposes, a company reports revenue from installment sales on the accrual basis. For income tax purposes, it reports the revenues by the installment-sales method, deferring recognition of gross profit until cash is collected.
(b) Pretax accounting income and taxable income differ because 80% of dividends received from U.S. corporations was deducted from taxable income, while 100% of the dividends received was reported for financial statement purposes.
(c) Estimated warranty costs (covering a three-year warranty) are expensed for accounting purposes at the time of sale but deducted for income tax purposes when paid.
Ex. 19-112—Temporary differences.
There are four types of temporary differences. For each type: (1) indicate the type and cause of the difference, (2) give an example, and (3) indicate whether it will create a taxable or deductible amount in the future.
Ex. 19-113—Operating loss carryforward.
In 2018, its first year of operations, Kimble Corp. has a $900,000 net operating loss when the tax rate is 30%. In 2019, Kimble has $250,000 taxable income and the tax rate remains 30%.
Instructions
Assume the management of Kimble Corp. thinks that it is more likely than not that the loss carryforward will not be realized in the near future because it is a new company (this is before results of 2019 operations are known).
(a) What are the entries in 2018 to record the tax effects of the loss carryforward?
(b) What entries would be made in 2019 to record the current and deferred income taxes and to recognize the loss carryforward? (Assume that at the end of 2019 it is more likely than not that the deferred tax asset will be realized.)
PROBLEMS
Pr. 19-114—Differences between accounting and taxable income and the effect on deferred taxes.
The following differences enter into the reconciliation of financial income and taxable income of Abbott Company for the year ended December 31, 2017, its first year of operations. The enacted income tax rate is 30% for all years.
Pretax accounting income $800,000
Excess tax depreciation (480,000)
Litigation accrual 70,000
Unearned rent revenue deferred on the books but appropriately
recognized in taxable income 60,000
Interest income from New York municipal bonds (20,000)
Taxable income $430,000
Pr. 19-114 (cont.)
1. Excess tax depreciation will reverse equally over a four-year period, 2018-2021.
2. It is estimated that the litigation liability will be paid in 2021.
3. Rent revenue will be recognized during the last year of the lease, 2021.
4. Interest revenue from the New York bonds is expected to be $20,000 each year until their maturity at the end of 2021.
Instructions
(a) Prepare a schedule of future taxable and (deductible) amounts.
(b) Prepare a schedule of the deferred tax (asset) and liability at the end of 2017.
(c) Since this is the first year of operations, there is no beginning deferred tax asset or liability. Compute the net deferred tax expense (benefit).
(d) Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2017.
Pr. 19-115—Multiple temporary differences.
The following information is available for the first three years of operations for Cooper Company:
1. Year Taxable Income
2017 $500,000
2018 375,000
2019 400,000
2. On January 2, 2017, heavy equipment costing $800,000 was purchased. The equipment had a life of 5 years and no salvage value. The straight-line method of depreciation is used for book purposes and the tax depreciation taken each year is listed below:
Tax Depreciation
2017 2018 2019 2020 Total
$264,000 $360,000 $120,000 $56,000 $800,000
3. On January 2, 2018, $360,000 was collected in advance for rental of a building for a three-year period. The entire $360,000 was reported as taxable income in 2018, but $240,000 of the $360,000 was reported as unearned revenue at December 31, 2018 for book purposes.
4. The enacted tax rates are 40% for all years.
Instructions
(a) Prepare a schedule comparing depreciation for financial reporting and tax purposes.
(b) Determine the deferred tax (asset) or liability at the end of 2017.
(c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2018.
(d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2018.
(e) Compute the net deferred tax expense (benefit) for 2018.
(f) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2018.
Pr. 19-116—Deferred tax asset.
Farmer Inc. began business on January 1, 2018. Its pretax financial income for the first 2 years was as follows:
2018 $240,000
2019 560,000
The following items caused the only differences between pretax financial income and taxable income.
1. In 2018, the company collected $420,000 of rent; of this amount, $140,000 was earned in 2018; the other $280,000 will be earned equally over the 2019–2020 period. The full $420,000 was included in taxable income in 2018.
2. The company pays $10,000 a year for life insurance on officers.
Pr. 19-116 (cont.)
3. In 2019, the company terminated a top executive and agreed to $90,000 of severance pay. The amount will be paid $30,000 per year for 2019–2021. The 2019 payment was made. The $90,000 was expensed in 2019. For tax purposes, the severance pay is deductible as it is paid.
The enacted tax rates existing at December 31, 2018 are:
2018 30% 2020 40%
2019 35% 2021 40%
Instructions
(a) Determine taxable income for 2018 and 2019.
(b) Determine the deferred income taxes at the end of 2018, and prepare the journal entry to record income taxes for 2018.
(c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2019.
(d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2019.
(e) Compute the net deferred tax expense (benefit) for 2019.
(f) Prepare the journal entry to record income taxes for 2019.
(g) Show how the deferred income taxes should be reported on the balance sheet at December 31, 2019.
Pr. 19-117—Interperiod tax allocation with change in enacted tax rates.
Murphy Company purchased equipment for $450,000 on January 2, 2017, its first day of operations. For book purposes, the equipment will be depreciated using the straight-line method over three years with no salvage value. Pretax financial income and taxable income are as follows:
2017 2018 2019
Pretax financial income $224,000 $260,000 $300,000
Taxable income 184,000 260,000 340,000
The temporary difference between pretax financial income and taxable income is due to the use of accelerated depreciation for tax purposes.
Instructions
(a) Prepare the journal entries to record income taxes for all three years (expense, deferrals, and liabilities) assuming that the enacted tax rate applicable to all three years is 30%.
(b) Prepare the journal entries to record income taxes for all three years (expense, deferrals, and liabilities) assuming that the enacted tax rate as of 2017 is 30% but that in the middle of 2018, Congress raises the income tax rate to 35% retroactive to the beginning of 2018.
IFRS QUESTIONS
True/False Questions
1. Under IFRS an affirmative judgment approach is used for recognizing deferred tax assets up to the amount that is probable to be realized.
2. Under GAAP, the rate used to compute deferred taxes is either the enacted tax rate, or a substantially enacted tax rate (virtually certain).
3. Under IFRS, a deferred tax liability is classified as current or noncurrent based on the classification of the asset or liability to which it relates.
4. Under IFRS, all tax effects are charged or credited to income.
5. Under IFRS, all potential liabilities associated with uncertain tax positions are recognized.
Multiple Choice Questions
6. Which of the following is false regarding accounting for deferred taxes under IFRS?
a. A deferred tax liability is classified as current or noncurrent based on the classification of the asset or liability to which it relates.
b. A deferred tax asset is recognized up to the amount that is probable to be realized.
c. Tax effects of certain items are recognized in equity.
d. The rate used to compute deferred taxes is either the enacted tax rate, or a substantially enacted tax rate (virtually certain).
7. Jerome Co. has the following deferred tax liabilities at December 31, 2018:
Amount Related to
$100,000 Installment sales, expected to be collected in 2019
$350,000 Fixed asset, 10-year remaining useful life, 2018 tax depreciation exceeds book depreciation
$90,000 Prepaid insurance related to 2019
What amount would Jerome Co. report as a noncurrent deferred tax liability under IFRS and under GAAP?
IFRS GAAP
a. $0 $450,000
b. $540,000 $540,000
c. $350,000 $350,000
d. $540,000 $350,000
8. With regard to recognition of deferred tax assets, IFRS requires
Approach Recognition
a. Affirmative judgment Recognize an asset up to the amount that is probable to be realized
b. Impairment approach Recognize asset in full, reduced by valuation allowance if it’s more likely than not that all or a portion of the asset won’t be realized
c. Affirmative judgment Recognize asset in full, reduced by valuation allowance if it’s more likely than not that all or a portion of the asset won’t be realized
d. Impairment approach Recognize an asset up to the amount that is probable to be realized
9. Match the approach, IFRS or GAAP, with the location where tax effects are reported:
Approach Location
a. IFRS Charge or credit only taxable temporary differences to income
b. GAAP Charge or credit certain tax effects to equity
c. IFRS Charge or credit certain tax effects to equity
d. GAAP Charge or credit only deductible temporary differences to income
10. Alice, Inc. has the following deferred tax assets at December 31, 2017:
Amount Related to
$180,000 Rent revenue collected in advance related to 2018
$75,000 Warranty liability, expected to be paid in 2018
$255,000 Accrued liability related to a lawsuit expected to settle in 2021
What amount would Alice, Inc. report as a current deferred tax asset under IFRS and under GAAP?
_IFRS_ GAAP
a $510,000 $510,000
b. $0 $0
c. $255,000 $510,000
d. $510,000 $255,000
B, LO: 6, AP, Difficulty: Moderate, 3, AACSB: Analytic, AICPA BB: International Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS
