ACCT 557 Suggeste Suggested d Review Assignments BE 19-8, BE 19-10, BE 19-14, E 19-1, E19-6, E19-7 BE19-8 Mitchell Corporation had income before income taxes of $195,000 in 2012. Mitchell’s current income tax expense is $48,000, and deferred income tax expense is $30,000. Prepare Mitchell’s 2012 income statement, beginning with Income before income taxes. Income before taxes Income Tax Expense Current $ 48,000 Deferred $ 30,000 Net Income
$ 195,000 $ 78,000 $ 117,000
CLASS QUESTION IF ACCOUNTING INCOME IS 420,000.TEMPORARY DIFFERENCES: DEPRECIATION -60,000 plus WARRANTY EXPENSE -60,000 TOTALS 120,000. TAXABLE INCOME IS 300,000. TAX RATE 40%.HOW WOULD WE RECORD INCOME TAX PAYABLE, INCOME TAX EXPENSES AND ANY Deferred ITEMS? Income Tax Expense Deferred Tax Liability ($120,000 x 40%) Income Tax Payable ($300,000 x 40%)
168,000 48,000 120,000
BE19-10 Clydesdale Corporation has a cumulative temporary difference related to depreciation of $580,000 at December 31, 2012. This difference will reverse as follows: 2013, $42,000; 2014, $244,000; and 2015, $294,000. Enacted tax rates are 34% for 2013 and 2014, and 40% for 2015. Compute the amount Clydesdale should report as a deferred tax liability at December 31, 2012.
2013 $ 42,000 *34% 14,280
2014 $ 244,000 *34% 82,960
2015 $ 294,000 *40% 117,600 =
Deferred Tax Liability $ 214,840
BE19-11 At December 31, 2012, Fell Corporation had a deferred tax liability of $680,000, resulting from future taxable amounts of $2,000,000 and an enacted tax rate of 34%. In May 2013, a new income tax act is signed into law that raises the tax rate to 40% for 2013 and future years. Prepare the journal entry for Fell to adjust the deferred tax liability. liability.
$ 2,000,000 * 40 % = 800,000 New Deferred tax liability (600,000) Existing Deferred tax liability Provision $120,000
Income Tax Expense Deferred Tax Liability
$ 120,000Dr $ 120,000Cr
BE19-13 Rode Inc. incurred a net operating loss of $500,000 in 2012. Combined income for 2010 and 2011 was $350,000. The tax rate for all years is 40%. Rode elects the carryback option. Prepare the journal entries to record the benefits of the loss carryback and the loss carryforward.
Net Profit/Loss Tax Rate Tax Paid
2010 & 2011 $350,000 40% $140,000
2012 Benefit Due c/f ($500,000) = (150,000) 40% = $60,000
Income Tax Refund Receivable (350,00,000 * 40%) Benefit Due to Loss Carryback (500,000 -350,000) * 40%
140,000 140,000
Deferred tax asset (500,000 – 350,000) * 40% Benefit Due to Loss Carryback (Income Tax Expense)
60,000 60,000
BE19-14 Use the information for Rode Inc. given in BE19-13 BE19-13.. Assume that it is more likely than not that the entire net operating loss carryforward will not be realized in future years. Prepare all the journal entries necessary at the end of 2012. To recognize benefit of loss carryback Income Tax Refund Receivable 140,000 Benefit Due to Loss Carryback (Income Tax Expense)
140,000
To recognize benefit of loss carryforward Deferred Tax Asset 60,000 Benefit Due to Loss Carryforward (Income Tax Expense)
60,000
To record allowance amount Benefit Due to Loss Carryforward (Income Tax Expense) 60,000 Allowance to Reduce Deferred Tax Asset Asset to Expected Realizable Value
60,000
E19-1 (One Temporary Difference, Future Taxable Amounts, One Rate, No Beginning Deferred Taxes) Starfleet Corporation has one temporary difference at the end of 2012 that will reverse and cause taxable amounts of $55,000 in 2013, $60,000 in 2014, and $75,000 in 2015. Starfleet’s pretax financial income for 2012 is $400,000, and the tax rate is 30% for all years. There are no deferred taxes at the beginning of 2012. Instructions (a)Compute taxable income and income taxes payable for 2012.
Pretax financial income Future taxable amounts Taxable income 2012
2015
2014
2013
75,000
60,000
55,000
2012 400,000 (190,000) 210,0000
Taxable Income end 2012 Tax rate 30% Current Tax Expense 2012
210,000 *30% 63,000
(b)Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2012.
Future taxable amounts Tax Rate Deferred Tax liability end
75,000 30% 22,500
60,000 30% 18,000
55,000 30% 16,500
Income Tax Expense Income Taxes Payable Deferred Tax Liability
190,000 57,000 120,000 63,000 57,000
(c)Prepare the income tax expense section of the income statement for 2012, beginning with the line “Income before income taxes.” Income before Taxes Income Tax Expense Current Deferred Net Income
400,000 63,000 57,000
120,000 $280,000
E19-6 (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) ___2___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) __1____A landlord collects some rents in advance. Rents received are taxable in the period when they are received. (c) __3____Expenses are incurred in obtaining tax-exempt income. (d) __1____Costs of guarantees and warranties are estimated and accrued for financial reporting purposes. (e) ___2___Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment-sales method for tax purposes. (f) ___3___Interest is received on an investment in tax-exempt municipal obligations.
(g) __2____For some assets, straight-line depreciation depreciation is used for both financial reporting purposes and tax purposes, but the assets’ lives are shorter for tax purposes. (h) __3____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) ___3___The tax return reports a deduction for 80% of the dividends received from U.S. corporations. corporations. The cost method is used in accounting for the related investments for financial reporting purposes (see Notes below). (j) __1____Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax-deductible in the period(s) when the related liabilities liabilities are settled. (k) ___1___Expenses on stock options are accrued for financial reporting purposes.
Notes; (i) – 3: When the cost method is used for financial reporting purposes, the dividends are recognized in the income statement in the period they are received, which is the same period they must be reported on the tax return. However, depending on the level of ownership by the investor, 70 % or 80% of the dividends received from other US corporations may be excluded from taxation because of a ‘dividends received deduction.’ These tax exempt dividends create a
permanent difference.
E19-7 (Terminology, (Terminology, Relationships, Computations, Entries) Instructions Complete the following statements by filling in the blanks. (a) In a period period in in which which a taxable taxable temporary temporary difference reverses, the reversal reversal will cause taxable income to be __ greater greater than) pretax financial income. greater than _____ (less than, greater (b) If a $68,000 balance balance in Deferred Tax Tax Asset was computed computed by use of a 40% rate, the underlying cumulative temporary difference amounts to $_ 170,000 170,000 ______. 68,000/40% (c)
Deferred taxes _ are _______ (are, are not) recorded recorded to account for permanent permanent differences. differences. are not _______
(d) If a taxable temporary temporary difference originates originates in in 2013, it will will cause taxable income for 2013 to be _ less less greater than) pretax financial financial income for 2013. than ___ (less than, greater (e) If total tax expense expense is $50,000 and deferred tax expense expense is $65,000, then the current current portion portion of the expense computation is referred to as current tax ___ benefit_ benefit) of $_ 15,000 benefit_ ___ (expense, benefit) 15,000 ______. (f) If a corporation’s tax return shows taxable income of $105,000 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? $_ 5,500_ _. (105*40%) – 36,500 5,500_ (g) An increase increase in the Deferred Deferred Tax Liability account on the balance sheet is recorded by a __ debit _____ debit _____ (debit, credit) to the Income Tax Expense account. (h) An income statement that reports reports current current tax expense of $82,000 and and deferred deferred tax benefit benefit of $23,000 will report total income tax expense of $__ 59,000 59,000 __. 82,000 – 23,000 (i) A valuation account is needed whenever it is judged to be _ more __ that a portion of of a more likely than not __ deferred tax asset _ will __ (will be, will not be) realized. realized. will not be_ (j) If the the tax return shows shows total taxes due for the the period period of of $75,000 but the the income income statement shows shows total income tax expense of $55,000, the difference of $20,000 is referred to as deferred tax _ benefit benefit ___ (expense, benefit).
SUMMARY WEEK 2 In regard to deferred taxes, please remember that they result from differences between taxable and financial income. Temporary differences, due to depreciation, installment sale revenue recognition, prepaid expenses or unearned income will reverse. The deferred tax asset or liability appearing on the balance sheet will reflect the remaining differences that will reverse. If a temporary difference causes taxable income to be lower than financial income, a deferred tax liability is created. If a temporary difference causes taxable income to be higher than financial income, a deferred tax asset is created. If both an asset and liability are created, GAAP requires they be separately presented and not netted on the financial statements. Permanent differences do not cause deferred tax assets or liabilities. Deferred tax assets and liabilities are classified as current or non current de pending upon when they are expected to reverse or when the benefit of an NOL will be realized. NOL's can be carried back five years and result in a receivable and reduction of income tax expenses. Any carryforward (up to 20 years is per mitted) creates a future deferred tax asset and also reduces tax expense. Pretax financial income is a number shown in a company's income statement prepared under GAAP. The FASB’s purpose in establishing accounting principles used to derive a company's earnings is to provide useful information to investors and creditors. Taxable income is a number shown in a corporation's income tax return. It is a statutory definition of income that is used by the IRS to raise money to fund the government and to achieve certain social objectives. A temporary difference shows the amount between the tax basis of an asset or liability and the financial basis on the balance sheet. The results will be an increase to taxable income when the deferred tax asset is recovered (reduced) or a decrease to taxable income when the deferred tax liability is settled. Permanent differences are items that are included in either financial income or taxable income but never recognized in the other. These permanent differences between pretax financial income and taxable income for a given year will not reverse in the future. There are no deferred tax assets or liabilities that result from permanent differences. Examples of permanent differences include interest received on state and municipal obligations, proceeds from life insurance on key executives, and compensation expense associated with certain employee stock options.
