To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 19 ACCOUNTING FOR INCOME TAXES TRUE-FALSE—Conceptual Answer F F T T F T F T F T F T T F F T T T F F No Description 10 11 12 13 14 15 16 17 18 19 20 Taxable income Use of pretax financial income Taxable amounts Deferred tax liability Deductible amounts Deferred tax asset Need for valuation allowance account Positive and negative evidence Computation of income tax expense Taxable temporary differences Taxable temporary difference examples Permanent differences Applying tax rates to temporary differences Change in tax rates Accounting for a loss carryback Tax effect of a loss carryforward Possible source of taxable income Classification of deferred tax assets and liabilities Classification of deferred tax accounts Method used for accounting for income taxes MULTIPLE CHOICE—Conceptual Answer b c a b a d c d b a a b c d b c d c No 21 22 23 24 25 26 27 28 29 30 P 31 S 32 P 33 S 34 S 35 S 36 S 37 38 Description Differences between taxable and accounting income Differences between taxable and accounting income Determination of income tax expense Determination of deferred tax expense Rationale for interperiod tax allocation Causes of a deferred tax liability Situation requiring interperiod tax allocation Permanent differences and interperiod tax allocation Permanent differences Differences arising from depreciation methods Temporary difference and a revenue item Effect of future taxable amount Causes of a deferred tax liability Distinction between temporary and permanent differences Identification of deductible temporary difference Identification of taxable temporary difference Identification of future taxable amounts Identify a permanent difference To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 19 - Test Bank for Intermediate Accounting, Twelfth Edition MULTIPLE CHOICE—Conceptual (cont.) Answer d d d b c c b d c b d d c c No 39 40 41 42 S 43 44 45 46 47 48 49 50 S 51 52 Description Identification of permanent differences Identification of temporary differences Difference due to the equity method of investment accounting Difference due to unrealized loss on marketable securities Accounting for change in tax rate Appropriate tax rate for deferred tax amounts Recognition of tax benefit of a loss carryforward Reasons for disclosure of deferred income tax information Classification of deferred income tax on the balance sheet Classification of deferred income tax on the balance sheet Basis for classification as current or noncurrent Income statement presentation of a tax benefit from NOL carryforward Classification of a deferred tax liability Procedures for computing deferred income taxes P These questions also appear in the Problem-Solving Survival Guide These questions also appear in the Study Guide *This topic is dealt with in an Appendix to the chapter S MULTIPLE CHOICE—Computational Answer a a d c b d c d b d a c a b a a d b c d b b d d b a a No Description 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 Calculate current/noncurrent portions of deferred tax liability Calculate income tax expense for the year Calculate amount of deferred tax asset to be recognized Calculate current deferred tax liability Determine income taxes payable for the year Calculate amount of deferred tax asset to be recognized Calculate current/noncurrent portions of deferred tax liability Calculate amount deducted for depreciation on the tax return Calculate amount of deferred tax asset to be recognized Calculate deferred tax asset with temporary and permanent differences Calculate deferred porton of income tax expense Computation of total income tax expense Calculate installment accounts receivable Computation of pretax financial income Calculate deferred tax liability amount Calculate income tax expense for the year Calculate income tax expense for the year Computation of income tax expense Computation of income tax expense Computation of warranty claims paid Determine change in deferred tax liability Calculate deferred tax liability with changing tax rates Calculate loss to be reported after NOL carryback Calculate loss to be reported after NOL carryback Calculate loss to be reported after NOL carryforward Determine income tax refund following an NOL carryback Calculate income tax benefit from an NOL carryback To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Income Taxes 19 - MULTIPLE CHOICE—CPA Adapted Answer a a c d d b a a c c No Description 80 81 82 83 84 85 86 87 88 89 Determine current income tax liability Determine current income tax liability Deferred tax liability arising from depreciation methods Deferred tax liability when using equity method of investment accounting Calculate deferred tax liability and income taxes currently payable Determine current income tax expense Deferred income tax liability from temporary and permanent differences Deferred tax liability arising from installment method Differences arising from depreciation and warranty expenses Deferred tax asset arising from warranty expenses EXERCISES Item E19-90 E19-91 E19-92 E19-93 E19-94 E19-95 E19-96 E19-97 E19-98 Description Computation of taxable income Future taxable and deductible amounts (essay) Deferred income taxes Deferred income taxes Recognition of deferred tax asset Permanent and temporary differences Permanent and temporary differences Temporary differences Operating loss carryforward PROBLEMS Item P19-99 P19-100 P19-101 P19-102 Description Differences between accounting and taxable income and the effect on deferred taxes Multiple temporary differences Deferred tax asset Interperiod tax allocation with change in enacted tax rates CHAPTER LEARNING OBJECTIVES Identify differences between pretax financial income and taxable income Describe a temporary difference that results in future taxable amounts Describe a temporary difference that results in future deductible amounts Explain the purpose of a deferred tax asset valuation allowance Describe the presentation of income tax expense in the income statement Describe various temporary and permanent differences Explain the effect of various tax rates and tax rate changes on deferred income taxes Apply accounting procedures for a loss carryback and a loss carryforward Describe the presentation of deferred income taxes in financial statements 10 Indicate the basic principles of the asset-liability method *11 Understand and apply the concepts and procedures of interperiod tax allocation To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 19 - Test Bank for Intermediate Accounting, Twelfth Edition SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item Type Item Type Item TF TF 21 22 MC MC 23 24 25 TF TF MC 26 27 28 MC MC MC 29 30 P 31 55 TF TF MC 58 60 61 MC MC MC 62 91 92 TF TF TF S 10 11 12 P 33 TF TF TF MC S 13 TF 14 TF 15 16 TF TF 17 45 TF MC 18 19 46 TF TF MC 47 48 49 MC MC MC 20 TF 52 MC Note: 32 MC 63 34 35 S 36 S 37 MC MC MC MC 38 39 40 41 S S 43 75 76 50 51 56 S TF = True-False MC = Multiple Choice E = Exercise P = Problem Type Item Type Item Learning Objective MC 80 MC 90 MC 81 MC 99 Learning Objective MC 53 MC 82 MC 54 MC 83 MC 57 MC 91 Learning Objective MC 93 E 99 E 94 E 100 E 98 E 101 Learning Objective Learning Objective MC 64 MC 84 Learning Objective MC 42 MC 68 MC 65 MC 69 MC 66 MC 70 MC 67 MC 71 Learning Objective MC 44 MC 73 Learning Objective MC 77 MC 79 MC 78 MC 98 Learning Objective MC 59 MC 87 MC 85 MC 88 MC 86 MC 89 Learning Objective 10 Type Item Type Item Type E P 100 101 P P MC MC E 92 93 99 E E P 100 101 P P MC 85 MC 98 E MC MC MC MC 72 95 96 97 MC E E E 99 101 P P MC 74 MC 102 P 101 P P P P MC E MC MC MC To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Income Taxes 19 - TRUE-FALSE—Conceptual Taxable income is a tax accounting term and is also referred to as income before taxes Pretax financial income is the amount used to compute income tax payable Taxable amounts increase taxable income in future years A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year Deductible amounts cause taxable income to be greater than pretax financial income in the future as a result of existing temporary differences A deferred tax asset represents the increase in taxes refundable in future years as a result of deductible temporary differences existing at the end of the current year A company reduces a deferred tax asset by a valuation allowance if it is probable that it will not realize some portion of the deferred tax asset Companies should consider both positive and negative evidence to determine whether it needs to record a valuation allowance to reduce a deferred tax asset A company should add a decrease in a deferred tax liability to income tax payable in computing income tax expense 10 Taxable temporary differences will result in taxable amounts in future years when the related assets are recovered 11 Examples of taxable temporary differences are subscriptions received in advance and advance rental receipts 12 Permanent differences not give rise to future taxable or deductible amounts 13 Companies must consider presently enacted changes in the tax rate that become effective in future years when determining the tax rate to apply to existing temporary differences 14 When a change in the tax rate is enacted, the effect is reported as an adjustment to income tax payable in the period of the change 15 Under the loss carryback approach, companies must apply a current year loss to the most recent year first and then to an earlier year 16 The tax effect of a loss carryforward represents future tax savings and results in the recognition of a deferred tax asset 17 A possible source of taxable income that may be available to realize a tax benefit for loss carryforwards is future reversals of existing taxable temporary differences 18 An individual deferred tax asset or liability is classified as current or noncurrent based on the classification of the related asset/liability for financial reporting purposes To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Test Bank for Intermediate Accounting, Twelfth Edition 19 - 19 Companies should classify the balances in the deferred tax accounts on the balance sheet as noncurrent assets and noncurrent liabilities 20 The FASB believes that the deferred tax method is the most consistent method for accounting for income taxes True-False Answers—Conceptual Item Ans F F T T F Item 10 Ans T F T F T Item 11 12 13 14 15 Ans F T T F F Item 16 17 18 19 20 Ans T T T F F MULTIPLE CHOICE—Conceptual 21 Taxable income of a corporation a differs from accounting income due to differences in intraperiod allocation between the two methods of income determination b differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination c is based on generally accepted accounting principles d is reported on the corporation's income statement 22 Taxable income of a corporation differs from pretax financial income because of a b c d 23 Permanent Differences No No Yes Yes Temporary Differences No Yes Yes No Interperiod income tax allocation causes a tax expense shown on the income statement to equal the amount of income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year b tax expense shown in the income statement to bear a normal relation to the tax liability c tax liability shown in the balance sheet to bear a normal relation to the income before tax reported in the income statement d tax expense in the income statement to be presented with the specific revenues causing the tax To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Income Taxes 19 - 24 The deferred tax expense is the a increase in balance of deferred tax asset minus the increase in balance of deferred tax liability b increase in balance of deferred tax liability minus the increase in balance of deferred tax asset c increase in balance of deferred tax asset plus the increase in balance of deferred tax liability d decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability 25 The rationale for interperiod income tax allocation is to a recognize a tax asset or liability for the tax consequences of temporary differences that exist at the balance sheet date b recognize a distribution of earnings to the taxing agency c reconcile the tax consequences of permanent and temporary differences appearing on the current year's financial statements d adjust income tax expense on the income statement to be in agreement with income taxes payable on the balance sheet 26 Interperiod tax allocation results in a deferred tax liability from a an income item partially recognized for financial purposes but fully recognized for tax purposes in any one year b the amount of deferred tax consequences attributed to temporary differences that result in net deductible amounts in future years c an income item fully recognized for tax and financial purposes in any one year d the amount of deferred tax consequences attributed to temporary differences that result in net taxable amounts in future years 27 Which of the following situations would require interperiod income tax allocation procedures? a An excess of percentage depletion over cost depletion b Interest received on municipal bonds c A temporary difference exists at the balance sheet date because the tax basis of an asset or liability and its reported amount in the financial statements differ d Proceeds from a life insurance policy on an officer 28 Interperiod income tax allocation procedures are appropriate when a an extraordinary loss will cause the amount of income tax expense to be less than the tax on ordinary net income b an extraordinary gain will cause the amount of income tax expense to be greater than the tax on ordinary net income c differences between net income for tax purposes and financial reporting occur because tax laws and financial accounting principles not concur on the items to be recognized as revenue and expense d differences between net income for tax purposes and financial reporting occur because, even though financial accounting principles and tax laws concur on the item to be recognized as revenues and expenses, they don't concur on the timing of the recognition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 19 - Test Bank for Intermediate Accounting, Twelfth Edition 29 Interperiod tax allocation would not be required when a costs are written off in the year of the expenditure for tax purposes but capitalized for accounting purposes b statutory (or percentage) depletion exceeds cost depletion for the period c different methods of revenue recognition arise for tax purposes and accounting purposes d different depreciable lives are used for machinery for tax and accounting purposes 30 Machinery was acquired at the beginning of the year Depreciation recorded during the life of the machinery could result in Future Taxable Amounts Yes Yes No No a b c d P 31 Future Deductible Amounts Yes No Yes No A temporary difference arises when a revenue item is reported for tax purposes in a period After it is reported Before it is reported in financial income in financial income a Yes Yes b Yes No c No Yes d No No S 32 At the December 31, 2007 balance sheet date, Garth Brooks Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes When this asset is recovered in 2008, a future taxable amount will occur and a pretax financial income will exceed taxable income in 2008 b Garth will record a decrease in a deferred tax liability in 2008 c total income tax expense for 2008 will exceed current tax expense for 2008 d Garth will record an increase in a deferred tax asset in 2008 P 33 Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a deferred tax liability on the balance sheet? I II III IV a b c d A revenue is deferred for financial reporting purposes but not for tax purposes A revenue is deferred for tax purposes but not for financial reporting purposes An expense is deferred for financial reporting purposes but not for tax purposes An expense is deferred for tax purposes but not for financial reporting purposes item II only items I and II only items II and III only items I and IV only To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Income Taxes 19 - S A major distinction between temporary and permanent differences is a permanent differences are not representative of acceptable accounting practice b temporary differences occur frequently, whereas permanent differences occur only once c once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference can change in status with the passage of time d temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences not reverse S Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income? a Advance rental receipts b Product warranty liabilities c Depreciable property d Fines and expenses resulting from a violation of law S Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income? a Subscriptions received in advance b Prepaid royalty received in advance c An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes d Interest received on a municipal obligation S 37 Which of the following differences would result in future taxable amounts? a Expenses or losses that are tax deductible after they are recognized in financial income b Revenues or gains that are taxable before they are recognized in financial income c Revenues or gains that are recognized in financial income but are never included in taxable income d Expenses or losses that are tax deductible before they are recognized in financial income 38 Renner Corporation's taxable income differed from its accounting income computed for this past year An item that would create a permanent difference in accounting and taxable incomes for Renner would be a a balance in the Unearned Rent account at year end b using accelerated depreciation for tax purposes and straight-line depreciation for book purposes c a fine resulting from violations of OSHA regulations d making installment sales during the year 39 An example of a permanent difference is a proceeds from life insurance on officers b interest expense on money borrowed to invest in municipal bonds c insurance expense for a life insurance policy on officers d all of these 40 Which of the following will not result in a temporary difference? a Product warranty liabilities b Advance rental receipts c Installment sales d All of these will result in a temporary difference 34 35 36 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 19 - 10 Test Bank for Intermediate Accounting, Twelfth Edition 41 A company uses the equity method to account for an investment This would result in what type of difference and in what type of deferred income tax? a b c d 42 Deferred Tax Asset Liability Asset Liability A company records an unrealized loss on short-term securities This would result in what type of difference and in what type of deferred income tax? a b c d S Type of Difference Permanent Permanent Temporary Temporary Type of Difference Temporary Temporary Permanent Permanent Deferred Tax Liability Asset Liability Asset 43 When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be a handled retroactively in accordance with the guidance related to changes in accounting principles b considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset c reported as an adjustment to tax expense in the period of change d applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax rate change, but not subsequent to the date of the change 44 Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if a it is probable that a future tax rate change will occur b it appears likely that a future tax rate will be greater than the current tax rate c the future tax rates have been enacted into law d it appears likely that a future tax rate will be less than the current tax rate 45 Recognition of tax benefits in the loss year due to a loss carryforward requires a the establishment of a deferred tax liability b the establishment of a deferred tax asset c the establishment of an income tax refund receivable d only a note to the financial statements 46 Major reasons for disclosure of deferred income tax information is (are) a better assessment of quality of earnings b better predictions of future cash flows c that it may be helpful in setting government policy d all of these 47 Accounting for income taxes can result in the reporting of deferred taxes as any of the following except a a current or long-term asset b a current or long-term liability c a contra-asset account d All of these are acceptable methods of reporting deferred taxes To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Income Taxes 19 - 21 86 In its 2007 income statement, Hertz Corp reported depreciation of $1,110,000 and interest revenue on municipal obligations of $210,000 Hertz reported depreciation of $1,650,000 on its 2007 income tax return The difference in depreciation is the only temporary difference, and it will reverse equally over the next three years Hertz's enacted income tax rates are 35% for 2007, 30% for 2008, and 25% for 2009 and 2010 What amount should be included in the deferred income tax liability in Hertz's December 31, 2007 balance sheet? a $144,000 b $186,000 c $225,000 d $262,500 87 Karr, 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 $900,000 will be collected in the following years when the enacted tax rates are: Collection of Income Enacted Tax Rates 2007 $ 90,000 35% 2008 180,000 30% 2009 270,000 30% 2010 360,000 25% The installment income is Karr's only temporary difference What amount should be included in the deferred income tax liability in Karr's December 31, 2007 balance sheet? a $225,000 b $256,500 c $283,500 d $315,000 88 For calendar year 2007, Neer Corp reported depreciation of $1,200,000 in its income statement On its 2007 income tax return, Neer reported depreciation of $1,800,000 Neer's income statement also included $225,000 accrued warranty expense that will be deducted for tax purposes when paid Neer's enacted tax rates are 30% for 2007 and 2008, and 24% for 2009 and 2010 The depreciation difference and warranty expense will reverse over the next three years as follows: Depreciation Difference Warranty Expense 2008 $240,000 $ 45,000 2009 210,000 75,000 2010 150,000 105,000 $600,000 $225,000 These were Neer's only temporary differences In Neer's 2007 income statement, the deferred portion of its provision for income taxes should be a $200,700 b $112,500 c $101,700 d $109,800 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 19 - 22 Test Bank for Intermediate Accounting, Twelfth Edition 89 Nevitt Co., organized on January 2, 2007, had pretax accounting income of $880,000 and taxable income of $1,600,000 for the year ended December 31, 2007 The only temporary difference is accrued product warranty costs which are expected to be paid as follows: 2008 2009 2010 2011 $240,000 120,000 120,000 240,000 The enacted income tax rates are 35% for 2007, 30% for 2008 through 2010, and 25% for 2011 If Nevitt expects taxable income in future years, the deferred tax asset in Nevitt's December 31, 2007 balance sheet should be a $144,000 b $168,000 c $204,000 d $252,000 Multiple Choice Answers—CPA Adapted Item 80 81 Ans a a Item 82 83 Ans Item c d 84 85 Ans d b Item Ans 86 87 a a Item 88 89 Ans c c DERIVATIONS — Computational No Answer Derivation 53 a ($640,000 – $400,000) × 30% = $72,000 54 a Income tax payable = ($750,000 × 30%) = $225,000 Change in deferred tax liability = ($1,000,000 × 30%) = $300,000 Change in deferred tax asset = ($1,250,000 × 30%) = $375,000 $225,000 + $300,000 – $375,000 = $150,000 55 d ($1,250,000 × 30%) = $375,000 56 c ($500,000 × 30%) = $150,000 57 b ($250,000 × 30%) = $75,000 58 d ($1,000,000 × 30%) = $300,000 59 c ($1,500,000 × 30%) = $450,000 60 d (30% × Temporary Difference) = $90,000; Temporary Difference = ($90,000 ÷ 30%) = $300,000; $1,500,000 + $300,000 = $1,800,000 61 b ($1,200,000 – $750,000) × 35% = $157,500 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Income Taxes DERIVATIONS — Computational (cont.) No Answer Derivation 62 d ($1,500,000 × 30%) = $450,000 63 a $225,000 × 40 = $90,000 debit 64 c ($600,000 × 35) + ($225,000 × 40) = $300,000 65 a $300,000 ÷ 30% = $1,000,000 temporary difference $1,000,000 ÷ 40% = $2,500,000 66 b $2,400,000 + ($1,350,000 – $960,000) = $2,790,000 67 a $84,000 × 40 = $33,600 68 a $72,000 + ($84,000 × 40) = $105,600 69 d $96,000 – ($28,000 × 40) = $84,800 70 b $92,000 – ($60,000 × 35) = $71,000 71 c $102,000 + ($30,000 × 35) = $112,500 72 d $95,000 – ($4,000 ÷ 40) = $85,000 73 b $300,000 × (.35 – 40) = $15,000 decrease 74 b ($30,000 × 35%) + ($30,000 × 35%) + ($30,000 × 30%) = $30,000 75 d $650,000 – (30% × $650,000) = $455,000 76 d ($100,000 × 30%) = $30,000; $800,000 × 40% = $320,000; ($900,000 – $30,000 – $320,000) = $550,000 77 b ($900,000 × 40%) = $360,000; $900,000 – $360,000 = $540,000 78 a ($400,000 × 30%) = $120,000 79 a ($750,000 × 45) + [($930,000 – $750,000) × 40] = $409,500 DERIVATIONS — CPA Adapted No Answer Derivation 80 a ($1,500,000 – $650,000 – $100,000) × 30% = $225,000; $225,000 – $125,000 = $100,000 81 a ($750,000 – $30,000 – $60,000) × 30% = $198,000; $198,000 – $150,000 = $48,000 19 - 23 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 19 - 24 Test Bank for Intermediate Accounting, Twelfth Edition DERIVATIONS — CPA Adapted (cont.) No Answer Derivation 82 c ($80,000 + $64,000 – $72,000) × 30% = $21,600 83 d ($360,000 – $120,000) × 40% = $96,000; $96,000 × 30% = $28,800 84 d ($50,000 × 30%) = $15,000; ($250,000 – $50,000) × 35% = $70,000 85 b ($720,000 × 34%) = $244,800 86 a ($180,000 × 30%) + ($180,000 × 25%) + ($180,000 × 25%) = $144,000 87 a ($180,000 × 30%) + ($270,000 × 30%) + ($360,000 × 25%) = $225,000 88 c ($240,000 – $45,000) × 30% = $58,500; ($210,000 – $75,000) × 24% = $32,400; ($150,000 – $105,000) × 24% = $10,800; $58,500 + $32,400 + $10,800 = $101,700 89 c ($240,000 + $120,000 + $120,000) × 30% = $144,000; $240,000 × 25% = $60,000; $144,000 + $60,000 = $204,000 EXERCISES Ex 19-90—Computation of taxable income The records for Orkin Co show this data for 2008: • Gross profit on installment sales recorded on the books was $360,000 Gross profit from collections of installment receivables was $270,000 • 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 Orkin may deduct 14% for 2008 • Interest received on tax exempt Iowa State bonds was $9,000 • The estimated warranty liability related to 2008 sales was $19,600 Repair costs under warranties during 2008 were $13,600 The remainder will be incurred in 2009 • Pretax financial income is $600,000 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 2008 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Income Taxes 19 - 25 Solution 19-90 (a) (b) Pretax financial income Permanent differences Life insurance Tax-exempt interest Temporary differences Installment sales ($360,000 – $270,000) Extra depreciation ($42,000 – $30,000) Warranties ($19,600 – $13,600) Taxable income $600,000 3,800 (9,000) (90,000) (12,000) 6,000 $498,800 Income Tax Expense [$149,640 + ($30,600 – $1,800)] Deferred Tax Asset (30% × $6,000) Deferred Tax Liability (30% × $102,000) Income Tax Payable (30% × $498,800) 178,440 1,800 30,600 149,640 Ex 19-91—Future taxable and deductible amounts Define temporary differences, future taxable amounts, and future deductible amounts Solution 19-91 Temporary differences are differences between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable amounts or deductible amounts in future years Future taxable amounts increase taxable income in future years and cause a deferred tax liability to be recorded Future deductible amounts decrease taxable income in future years and cause a deferred tax asset to be recorded Ex 19-92—Deferred income taxes Nott Co at the end of 2007, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income Extra depreciation taken for tax purposes Estimated expenses deductible for taxes when paid Taxable income $ 420,000 (1,050,000) 840,000 $ 210,000 Use of the depreciable assets will result in taxable amounts of $350,000 in each of the next three years The estimated litigation expenses of $840,000 will be deductible in 2010 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 2007, assuming a tax rate of 40% for all years To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 19 - 26 Test Bank for Intermediate Accounting, Twelfth Edition Solution 19-92 (a) Future taxable (deductible) amounts Extra depreciation Litigation (b) 2008 2009 $350,000 $350,000 Income Tax Expense ($84,000 + $420,000 – $336,000) Deferred Tax Asset ($840,000 × 40%) Deferred Tax Liability ($1,050,000 × 40%) Income Tax Payable ($210,000 × 40%) 2010 Total $350,000 $1,050,000 (840,000) (840,000) 168,000 336,000 420,000 84,000 Ex 19-93—Deferred income taxes Earl Co at the end of 2007, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 750,000 Estimated expenses deductible for taxes when paid 1,200,000 Extra depreciation (1,350,000) Taxable income $ 600,000 Estimated warranty expense of $800,000 will be deductible in 2008, $300,000 in 2009, and $100,000 in 2010 The use of the depreciable assets will result in taxable amounts of $450,000 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 2007, assuming an income tax rate of 40% for all years Solution 19-93 (a) 2008 Future taxable (deductible) amounts Warranties $(800,000) Excess depreciation 450,000 (b) 2009 2010 $(300,000) $(100,000) $(1,200,000) 450,000 450,000 1,350,000 Income Tax Expense [$240,000 + ($540,000 – $480,000)] Deferred Tax Asset ($1,200,000 × 40%) Deferred Tax Liability ($1,350,000 × 40%) Income Tax Payable ($600,000 × 40%) 300,000 480,000 Ex 19-94—Recognition of deferred tax asset (a) (b) Total Describe a deferred tax asset When should a deferred tax asset be reduced by a valuation allowance? 540,000 240,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Income Taxes 19 - 27 Solution 19-94 (a) A deferred tax asset is the deferred tax consequences attributable to deductible temporary differences and operating loss carryforwards (b) A deferred tax asset should be reduced by a valuation allowance if, based on all available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized More likely than not means a level of likelihood that is at least slightly more than 50% Ex 19-95—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 Investments accounted for by the equity method Advance rental receipts Fine for polluting Estimated future warranty costs Excess of contributions over pension expense Expenses incurred in obtaining tax-exempt revenue Installment sales Excess tax depreciation over accounting depreciation Long-term construction contracts 10 Premiums paid on life insurance of officers (company is the beneficiary) Solution 19-95 10 Temporary difference, deferred tax liability Temporary difference, deferred tax asset Permanent difference Temporary difference, deferred tax asset Temporary difference, deferred tax liability Permanent difference Temporary difference, deferred tax liability Temporary difference, deferred tax liability Temporary difference, deferred tax liability Permanent difference Ex 19-96—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 method, deferring recognition of gross profit until cash is collected To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 19 - 28 Test Bank for Intermediate Accounting, Twelfth Edition Ex 19-96 (cont.) (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 Solution 19-96 (a) Temporary difference This difference in the timing of revenue recognition for pretax financial income and taxable income will initially increase pretax financial income, but will increase taxable income by the amount of deferred gross profits as cash is collected in subsequent years Assuming the estimate as to collectibility of installment receivables is valid, the total amounts reported as gross profits for accounting purposes and for tax purposes will be equal over the life of a group of installment receivables The time lag between the accrual for accounting purposes and the recognition for tax purposes will result in credit entries to a company's deferred tax liability as long as installment sales are level or increasing The credit entries related to particular installment receivables will be "drawn down," or reversed, however, when the receivables are collected (b) Permanent difference This difference in pretax financial income and taxable income will never reverse because present tax laws allow a company that owns stock in another U.S corporation to deduct 80% of the dividends it receives from that company Taxes will not be paid on the dividends deducted and there are no tax consequences for those dividends, even though they are recognized as income for book purposes (c) Temporary difference The full estimated three years of warranty expenses reduce the current year's pretax financial income, but will reduce taxable income in varying amounts each year as paid Assuming the estimate for each warranty is valid, the total amounts deducted for accounting and for tax purposes will be equal over the three-year period for each warranty This is an example of an expense that, in the first period, reduces pretax financial income more than taxable income and, in later years, reverses and reduces taxable income without affecting pretax financial income Ex 19-97—Temporary differences There are four types of temporary differences For each type: (1) indicate the cause of the difference, (2) give an example, and (3) indicate whether it will create a taxable or deductible amount in the future Solution 19-97 (a) Revenues or gains are taxable after they are recognized in pretax financial income Examples are installment sales, long-term construction contracts, and the equity method of accounting for investments They result in future taxable amounts To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Income Taxes 19 - 29 Solution 19-97 (cont.) (b) Revenues or gains are taxable before they are recognized in pretax financial income Examples are subscriptions received in advance and rents received in advance They result in future deductible amounts (c) Expenses or losses are deductible before they are recognized in pretax financial income Examples are extra depreciation, prepaid expenses, and pension funding in excess of pension expense They result in future taxable amounts (d) Expenses or losses are deductible after they are recognized in pretax financial income Examples are warranty expenses, estimated litigation losses, and unrealized loss on marketable securities They result in future deductible amounts Ex 19-98—Operating loss carryforward In 2007, its first year of operations, Penner Corp has a $900,000 net operating loss when the tax rate is 30% In 2008, Penner has $360,000 taxable income and the tax rate remains 30% Instructions Assume the management of Penner 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 2008 operations are known) (a) What are the entries in 2007 to record the tax loss carryforward? (b) What entries would be made in 2008 to record the current and deferred income taxes and to recognize the loss carryforward? (Assume that at the end of 2008 it is more likely than not that the deferred tax asset will be realized.) Solution 19-98 (a) (b) Deferred Tax Asset ($900,000 × 30%) Benefit Due to Loss Carryforward 270,000 Benefit Due to Loss Carryforward Allowance to Reduce Deferred Tax Asset to Expected Realizable Value 270,000 Income Tax Expense ($360,000 × 30%) Deferred Tax Asset 108,000 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value Benefit Due to Loss Carryforward 270,000 270,000 108,000 108,000 108,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 19 - 30 Test Bank for Intermediate Accounting, Twelfth Edition PROBLEMS Pr 19-99—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 Hatley Company for the year ended December 31, 2007, its first year of operations The enacted income tax rate is 30% for all years Pretax accounting income Excess tax depreciation Litigation accrual Unearned rent revenue deferred on the books but appropriately recognized in taxable income Interest income from New York municipal bonds Taxable income $700,000 (320,000) 70,000 50,000 (20,000) $480,000 Excess tax depreciation will reverse equally over a four-year period, 2008-2011 It is estimated that the litigation liability will be paid in 2011 Rent revenue will be recognized during the last year of the lease, 2011 Interest revenue from the New York bonds is expected to be $20,000 each year until their maturity at the end of 2011 Instructions (a) Prepare a schedule of future taxable and (deductible) amounts (b) Prepare a schedule of the deferred tax (asset) and liability (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 2007 Solution 19-99 (a) 2008 Future taxable (deductible) amounts: Depreciation $80,000 Litigation Unearned rent (b) Temporary Differences Depreciation Litigation Unearned rent Totals (c) Deferred tax expense Deferred tax benefit Net deferred tax expense Future Taxable (Deductible) Amounts $320,000 (70,000) (50,000) $200,000 2009 2010 $80,000 $80,000 Tax Rate 30% 30% 30% $96,000 (36,000) $60,000 2011 Total $80,000 $320,000 (70,000) (70,000) (50,000) (50,000) Deferred Tax (Asset) Liability $96,000 $(21,000) (15,000) $(36,000) $96,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Income Taxes 19 - 31 Solution 19-99 (cont.) (d) Income Tax Expense ($144,000 + $60,000) Deferred Tax Asset Deferred Tax Liability Income Tax Payable ($480,000 × 30%) 204,000 36,000 96,000 144,000 Pr 19-100—Multiple temporary differences The following information is available for the first three years of operations for Taylor Company: Year 2006 2007 2008 Taxable Income $500,000 330,000 400,000 On January 2, 2006, heavy equipment costing $600,000 was purchased The equipment had a life of 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: 2006 $198,000 2007 $270,000 Tax Depreciation 2008 2009 $90,000 $42,000 Total $600,000 On January 2, 2007, $240,000 was collected in advance for rental of a building for a threeyear period The entire $240,000 was reported as taxable income in 2007, but $160,000 of the $240,000 was reported as unearned revenue at December 31, 2007 for book purposes 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 2006 (c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2007 (d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2007 (e) Compute the net deferred tax expense (benefit) for 2007 (f) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2007 Solution 19-100 (a) Year 2006 2007 2008 2009 2010 Depreciation for Financial Reporting Purposes $120,000 120,000 120,000 120,000 120,000 $600,000 Depreciation for Tax Purposes $198,000 270,000 90,000 42,000 -0$600,000 Temporary Difference $ (78,000) (150,000) 30,000 78,000 120,000 $ -0- To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 19 - 32 Test Bank for Intermediate Accounting, Twelfth Edition Solution 19-100 (cont.) (b) 2007 Future taxable (deductible) amounts: Depreciation $(150,000) 2008 2009 2010 Total $30,000 $78,000 $120,000 $78,000 Deferred tax liability: $78,000 × 40% = $31,200 at the end of 2006 (c) Future taxable (deductible) amounts: Depreciation Rent 2008 2009 2010 Total $30,000 (80,000) $78,000 (80,000) $120,000 $228,000 (160,000) (d) Future Taxable (Deductible) Amounts $228,000 (160,000) $ 68,000 Temporary Differences Depreciation Rent Totals (e) (f) Tax Rate 40% 40% Deferred Tax (Asset) Liability $91,200 $(64,000) $(64,000) $91,200 Deferred tax asset at end of 2007 Deferred tax asset at beginning of 2007 Deferred tax (benefit) $(64,000) -0$(64,000) Deferred tax liability at end of 2007 Deferred tax liability at beginning of 2007 Deferred tax expense $91,200 31,200 $60,000 Deferred tax (benefit) Deferred tax expense Net deferred tax benefit for 2007 $(64,000) 60,000 $ (4,000) Income Tax Expense ($132,000 – $4,000) Deferred Tax Asset Deferred Tax Liability Income Tax Payable ($330,000 × 40%) 128,000 64,000 60,000 132,000 Pr 19-101—Deferred tax asset Yarman Inc began business on January 1, 2007 Its pretax financial income for the first years was as follows: 2007 2008 $240,000 560,000 The following items caused the only differences between pretax financial income and taxable income To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Income Taxes 19 - 33 Pr 19-101 (cont.) In 2007, the company collected $180,000 of rent; of this amount, $60,000 was earned in 2007; the other $120,000 will be earned equally over the 2008-2009 period The full $180,000 was included in taxable income in 2007 The company pays $10,000 a year for life insurance on officers In 2008, the company terminated a top executive and agreed to $90,000 of severance pay The amount will be paid $30,000 per year for 2008-2010 The 2008 payment was made The $90,000 was expensed in 2008 For tax purposes, the severance pay is deductible as it is paid The enacted tax rates existing at December 31, 2007 are: 2007 2008 30% 35% 2009 2010 40% 40% Instructions (a) Determine taxable income for 2007 and 2008 (b) Determine the deferred income taxes at the end of 2007, and prepare the journal entry to record income taxes for 2007 (c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2008 (d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2008 (e) Compute the net deferred tax expense (benefit) for 2008 (f) Prepare the journal entry to record income taxes for 2008 (g) Show how the deferred income taxes should be reported on the balance sheet at December 31, 2008 Solution 19-101 (a) Pretax financial income Permanent differences: Life insurance Temporary differences: Rent Severance pay Taxable income (b) Future taxable (deductible) amounts: Rent Tax rate Deferred tax (asset) liability 2007 $240,000 2008 $560,000 10,000 250,000 10,000 570,000 120,000 -0$370,000 (60,000) 60,000 $570,000 2008 2009 Total $(60,000) 35% $(21,000) $(60,000) 40% $(24,000) $(120,000) Income Tax Expense ($111,000 – $45,000) Deferred Tax Asset Income Tax Payable ($370,000 × 30%) $(45,000) at end of 2007 66,000 45,000 111,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 19 - 34 Test Bank for Intermediate Accounting, Twelfth Edition Solution 19-101 (cont.) (c) Future taxable (deductible) amounts: Rent Severance pay (d) Temporary Difference Rent Severance pay Totals 2009 2010 Total $(60,000) (30,000) $(30,000) $(60,000) (60,000) Future Taxable (Deductible) Amounts $ (60,000) (60,000) $(120,000) Tax Rate 40% 40% (e) Deferred tax asset at end of 2008 Deferred tax asset at beginning of 2008 Net deferred tax (expense) for 2008 (f) Income Tax Expense ($199,500 – $3,000) Deferred Tax Asset Income Tax Payable ($570,000 × 35%) (g) Deferred Tax (Asset) Liability $(24,000) (24,000) $(48,000) $(48,000) (45,000) $ (3,000) 196,500 3,000 199,500 The deferred income taxes should be reported on the December 31, 2008 balance sheet as follows: Current assets Deferred tax asset ($90,000* × 40%) $36,000 Other assets Deferred tax asset ($30,000 × 40%) $12,000 *$60,000 + $30,000 Pr 19-102—Interperiod tax allocation with change in enacted tax rates Norway Company purchased equipment for $180,000 on January 2, 2006, 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: 2006 2007 2008 Pretax financial income $224,000 $260,000 $300,000 Taxable income 200,000 260,000 324,000 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 2006 is 30% but that in the middle of 2007, Congress raises the income tax rate to 35% retroactive to the beginning of 2007 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Income Taxes 19 - 35 Solution 19-102 (a) Book depreciation Tax depreciation Temporary difference 2006 2007 2008 (b) 2006 2007 2008 2006 $ 60,000 84,000 $(24,000) 2007 $60,000 60,000 $ -0- 2008 $60,000 36,000 $24,000 Total $180,000 180,000 $ -0- Income Tax Expense Deferred Tax Liability ($24,000 × 30) Income Tax Payable ($200,000 × 30) 67,200 Income Tax Expense Income Tax Payable ($260,000 × 30) 78,000 Income Tax Expense Deferred Tax Liability Income Tax Payable ($324,000 × 30) 90,000 7,200 Income Tax Expense Deferred Tax Liability ($24,000 × 30) Income Tax Payable ($200,000 × 30) 67,200 Income Tax Expense Deferred Tax Liability Income Tax Payable ($260,000 × 35) 92,200 Income Tax Expense Deferred Tax Liability Income Tax Payable ($324,000 × 35) 105,000 8,400 *Future taxable amount Deferred tax @ 30% Deferred tax @ 35% Adjustment 2008 $24,000 7,200 8,400 $ 1,200 7,200 60,000 78,000 97,200 7,200 60,000 1,200* 91,000 113,400 ... 30% = $198 ,000; $198 ,000 – $150,000 = $48,000 19 - 23 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 19 - 24 Test Bank for Intermediate Accounting, ... expenses Deferred tax asset arising from warranty expenses EXERCISES Item E19-90 E19-91 E19-92 E19-93 E19-94 E19-95 E19-96 E19-97 E19-98 Description Computation of taxable income Future taxable and deductible... slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 19 - 28 Test Bank for Intermediate Accounting, Twelfth Edition Ex 19- 96 (cont.) (b) Pretax accounting income and taxable