Excercise 19 [PDF]

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PR Exercise 19 E19.1 (LO1, 2) (One Temporary Difference, Future Taxable Amounts, One Rate, No Beginning Deferred Taxes) Starfleet Corporation has one temporary difference at the end of 2018 that will reverse and cause taxable amounts of $55,000 in 2019, $60,000 in 2020, and $75,000 in 2021. Starfleet's pretax financial income for 2018 is $400,000, and the tax rate is 30% for all years. There are no deferred taxes at the beginning of 2018. Instructions a. Compute taxable income and income taxes payable for 2018. b. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2018. c. Prepare the income tax expense section of the income statement for 2018, beginning with the line “Income before income taxes.” (a)



Pretax financial income for 2018......................................................................................



$400,000



Temporary difference resulting in future taxable amounts



in 2019..................................................................................................



(55,000)



in 2020..................................................................................................



(60,000)



in 2021..................................................................................................



(75,000



Taxable income for 2018..................................................................................................



$210,000



Taxable income for 2018..................................................................................................



$210,000



Enacted tax rate............................................................................................................... Income taxes payable for 2018.........................................................................................



(b) Future taxable (deductible) amounts Tax rate Deferred tax liability (asset)



2019 $55,000 X 30% $16,500



Future Years 2020 $60,000 X 30% $18,000



2021 $75,000 X 30% $22,500



Deferred tax liability at the end of 2018......................................... Deferred tax liability at the beginning of 2018................................ Deferred tax expense for 2018 (increase in deferred tax liability).................................................................. Current tax expense for 2018    (Income taxes payable)................................................................ Income tax expense for 2018.......................................................... Income Tax Expense....................................................................... Income Taxes Payable...........................................................



X 30% $ 63,000



Total $190,000 $ 57,000 $ 57,000 0 57,000 63,000 $120,000



120,000 63,000



Deferred Tax Liability............................................................ (c)



Income before income taxes........................................................... Income tax expense Current................................................................................. Deferred............................................................................... Net income.....................................................................................



57,000 $400,000 $63,000 57,000



120,000 $280,000



E19.2 (LO1) (Two Differences, No Beginning Deferred Taxes, Tracked through 2 Years) The following information is available for McKee plc for 2019. 1. Excess of tax depreciation over book depreciation, Åí40,000. This Åí40,000 difference will reverse equally over the years 2020–2023. 2. Deferral, for book purposes, of Åí25,000 of rent received in advance. The rent will be recorded as revenue in 2020 3. Pretax financial income, Åí350,000. 4. Tax rate for all years, 40%. Instructions a. Compute taxable income for 2019. b. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2019. c. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2020, assuming taxable income of 325,000. (a)



Pretax financial income for 2019................................................... Excess of tax depreciation over    book depreciation...................................................................... Rent received in advance.............................................................. Taxable income...................................................................



(b)



Income Tax Expense..................................................................... Deferred Tax Asset....................................................................... Income Taxes Payable (£335,000 X .40)............................... Deferred Tax Liability.......................................................... 16,000** Temporary Difference



Future Taxable (Deductible) Amounts



Tax Rate



£350,000 (40,000) 25,000 £335,000 140,000 10,000* 134,000



Deferred Tax



(c)



Income Tax Expense..................................................................... Deferred Tax Liability (£10,000 X .40)........................................... Income Taxes Payable (£325,000 X .40)............................... Deferred Tax Asset (£25,000 X .40)...................................... 10,000



136,000* 4,000 130,000



*(£130,000 – £4,000 + £10,000)



E19.5 (LO1, 2) (Two Temporary Differences, One Rate, Beginning Deferred Taxes) The following facts relate to Alschuler plc. 1. Deferred tax liability, January 1, 2019, 40,000. 2. Deferred tax asset, January 1, 2019, Åí0. 3. Taxable income for 2019, Åí115,000. 4. Pretax financial income for 2019, Åí200,000. 5. Cumulative temporary difference at December 31, 2019, giving rise to future taxable amounts, Åí220,000. 6. Cumulative temporary difference at December 31, 2019, giving rise to future deductible amounts, Åí35,000. 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 2019. b. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2019. c. Prepare the income tax expense section of the income statement for 2019, beginning with the line “Income before income taxes.” EXERCISE 19.5 (15–20 minutes) (a)



Taxable income.............................................................................. Enacted tax rate............................................................................. Income taxes payable....................................................................



(b)



Income Tax Expense....................................................................... Deferred Tax Asset......................................................................... Income Taxes Payable...........................................................



£115,000 X 40% £ 46,000 80,000 14,000



Deferred Tax Liability............................................................ Temporary Difference Item one Item two Totals



Future Taxable (Deductible) Amounts (£220,000 ( (35,000) £185,000



Tax Rate 40% 40%



Deferred Tax (Asset) Liability £88,000 £(14,000)               £(14,000) £88,000



*Because of a flat tax rate, these totals can be reconciled: £185,000 X 40% = £(14,000) + £88,000.



(c)



Deferred tax liability at the end of 2019.......................................................... Deferred tax liability at the beginning of 2019................................................. Deferred tax expense for 2019 (increase required in deferred tax liability).................................................................



£ 88,000 (40,000



Deferred tax asset at the end of 2019.............................................................. Deferred tax asset at the beginning of 2019.................................................... Deferred tax benefit for 2019 (increase required in deferred tax asset).....................................................................



£ (14,000 0



Deferred tax expense for 2019........................................................................ Deferred tax benefit for 2019.......................................................................... Net deferred expense for 2019........................................................................ Current tax expense for 2019 (Income taxes payable)..................................... Income tax expense for 2019...................................................... £ 80,000



£ 48,000 (14,000 34,000 46,000



Income before income taxes....................................................... Income tax expense Current.............................................................................. Deferred ....... ....... Net income.................................................................................



£200,000



£ 48,000



£ (14,000



£46,000 34,000 80,000 £120,000



Note to instructor: Because of the flat tax rate for all years, the amount of cumulative temporary difference existing at the beginning of the year can be calculated by dividing the £40,000 balance in Deferred Tax Liability by 40%, which equals £100,000. This information may now be combined with the other facts given in the exercise to reconcile pretax financial income with taxable income as follows:



Pretax financial income................................................................................... Net originating temporary difference giving rise to future taxable amounts (£220,000 – £100,000).................................................................................. Originating temporary difference giving rise to future deductible amounts................................................................ Taxable income...............................................................................................



E19.6 (LO1, 2) (Identify Temporary or Permanent Differences) The following items 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. ______ An accelerated 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. ______ Interest is received on an investment in tax-exempt governmental obligations. g. ______ 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. h. ______ The tax return reports a deduction for 80% of the dividends received from various corporations. The cost method is used in accounting for the related investments for financial reporting purposes. i. ______ Estimated losses on pending lawsuits and claims are accrued for



£200,000 (120,000) 35,000 £115,000



books. These losses are tax-deductible in the period(s) when the related liabilities are settled. j. ______ Expenses on share options are accrued for financial reporting purposes EXERCISE 19.6 (10–15 minutes) (a) (b) (c) (d)



(2) (1) (3) (1)



(e) (f) (g) (h)



(2) (3) (2) (3)*



(i)(1) (j)(1)



*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. Various countries permit companies that receive dividend income from another company to treat part of these dividends as tax-exempt