EXERCISE
19-8
(a) 2004
Income Tax Expense ................................................................................... 336,000
Deferred Tax Asset ($20,000 x 40%) ............................................................. 8,000
Deferred
Tax Liability ($30,000 x 40%) .......................................................... 12,000
Income
Tax Payable ($830,000 x 40%) ........................................................ 332,000
2005
Income Tax Expense ................................................................................... 364,000
Deferred Tax Asset ($10,000 x 40%) ............................................................. 4,000
Deferred
Tax Liability ($40,000 x 40%) .......................................................... 16,000
Income
Tax Payable ($880,000 x 40%) ........................................................ 352,000
2006
Income Tax Expense ................................................................................... 378,000
Deferred Tax Asset ($8,000 x 40%) ............................................................... 3,200
Deferred
Tax Liability ($10,000 x 40%) .......................................................... 4,000
Income
Tax Payable ($943,000 x 40%) ........................................................ 377,200
(b)
Current assets
Deferred
tax asset ($8,000 + $4,000 + $3,200) $15,200
Long-term liabilities
Deferred
tax liability ($12,000 + $16,000 +
$4,000) $32,000
The warranty is classified as current
because settlement is within one year.
The deferred tax liability is noncurrent
because the related asset is noncurrent.
(c)
Pretax financial income $945,000
Income tax expense
Current $377,200
Deferred
($10,000 – $8,000) X .40 800 378,000
Net Income $567,000
EXERCISE 19-9 (15-20 minutes)
2001
Income Tax Expense..............................................................................................
32,000
Income
Tax Payable ($80,000 X 40%)...................................................................... 32,000
2002
Income Tax Refund Receivable.............................................................................
72,000
($160,000 X 45%)
Benefit
Due to Loss Carryback
(Income Tax Expense).......................................................................................... 72,000
2003
Income Tax Refund Receivable.............................................................................
32,000
Benefit
Due to Loss Carryback
(Income Tax Expense).......................................................................................... 32,000
($80,000 X 40%)
2003
Deferred Tax Asset................................................................................................. 120,000
Benefit
Due to Loss Carryforward
(Income Tax Expense).......................................................................................... 120,000
[40% X ($380,000 – $80,000)]
2004
Income Tax Expense.................................................................................................. 48,000
Deferred
Tax Asset (40% X $120,000)........................................................................ 48,000
2005
Income Tax Expense.................................................................................................. 40,000
Deferred
Tax Asset ($100,000 X 40%)........................................................................ 40,000
Note: Benefit Due to Loss Carryback
and Benefit Due to Loss Carryforward amounts are negative components of income
tax expense.
EXERCISE 19-9 (15-20 minutes)
2001
Income Tax Expense...........................................................................................
32,000
Income
Tax Payable ($80,000 X 40%)................................................................. 32,000
2002
Income Tax Refund Receivable.........................................................................
72,000
($160,000 X 45%)
Benefit
Due to Loss Carryback
(Income Tax Expense)......................................................................................... 72,000
2003
Income Tax Refund Receivable.........................................................................
32,000
Benefit
Due to Loss Carryback
(Income Tax Expense)......................................................................................... 32,000
($80,000 X 40%)
2003
Deferred Tax Asset............................................................................................. 120,000
Benefit
Due to Loss Carryforward
(Income Tax Expense)......................................................................................... 120,000
[40% X ($380,000 – $80,000)]
2004
Income Tax Expense............................................................................................... 48,000
Deferred
Tax Asset (40% X $120,000).................................................................. 48,000
2005
Income Tax Expense............................................................................................... 40,000
Deferred
Tax Asset ($100,000 X 40%).................................................................. 40,000
Note: Benefit Due to Loss Carryback
and Benefit Due to Loss Carryforward amounts are negative components of income
tax expense.
EXERCISE 19-11
|
|
Resulting Deferred Tax |
Related Balance
Sheet |
|
|
|
Temporary Difference |
(Asset) |
Liability |
Account |
Classification |
|
Depreciation |
|
$200,000 |
Plant Assets |
Noncurrent |
|
Lawsuit obligation |
$(50,000) |
|
Lawsuit Obligation |
Current |
|
Installment sale |
|
48,000* |
Installment Receivable |
Current |
|
Installment sale |
|
177,000** |
Installment Receivable |
Noncurrent |
|
Totals |
$(50,000) |
$425,000 |
|
|
*$120,000 X 40% = $48,000 **$225,000 – $48,000 = $177,000
Current assets
Deferred tax
asset ($50,000 – $48,000) $ 2,000
Long-term liabilities
Deferred tax
liability ($200,000 + $177,000) 377,000
EXERCISE
19-17
Journal entry at December 31, 2003:
Income
Tax Expense........................................................................................ 67,900
Deferred
Tax Asset...........................................................................................
4,500
Income
Tax Payable.......................................................................................... 65,200
Deferred
Tax Liability......................................................................................... 7,200
Taxable
income for 2003 $163,000
Enacted
tax rate 40%
Income tax
payable for 2003 $ 65,200
The deferred tax account balances at December 31, 2003, are
determined as follows:
|
Temporary
Difference |
Future Taxable
(Deductible) Amounts |
Rate |
Deferred Tax |
|
|
(Asset) |
Liability |
|||
|
Installment sales |
($16,000 |
45% |
|
$7,200 |
|
Warranty costs |
( (10,000) |
45% |
$(4,500) |
|
|
Totals |
$ 6,000 |
|
$(4,500) |
$7,200* |
*Because
all deferred taxes were computed at the same rate, these totals can be
reconciled as follows: $6,000 X 45% =
$(4,500) + $7,200.
Deferred
tax liability at the end of 2003 $7,200
Deferred
tax liability at the beginning of 2003 0
Deferred
tax expense for 2003 (net increase
required in deferred tax liability) $7,200
Deferred
tax asset at the end of 2003 $(4,500
Deferred
tax asset at the beginning of 2003 0
Deferred
tax expense (benefit) for 2003 (net
increase required in deferred tax asset) $(4,500)
Deferred
tax expense for 2003 $ 7,200
Deferred tax
benefit for 2003 (4,500)
Net
deferred tax expense for 2003 2,700
Current
tax expense for 2003 (Income tax payable) 65,200
Income
tax expense for 2003 $67,900
Journal
entry at December 31, 2004:
Income
Tax Expense....................................................................................... 94,500
Deferred
Tax Liability.......................................................................................
3,600
Income
Tax Payable......................................................................................... 95,850
Deferred
Tax Asset........................................................................................... 2,250
Taxable
income $213,000
Enacted
tax rate 45%
Income tax
payable for 2004 $ 95,850
The deferred tax account balances at December 31, 2004, are
determined as follows:
|
Temporary
Difference |
Future Taxable
(Deductible) Amounts |
Rate |
Deferred Tax |
|
|
(Asset) |
Liability |
|||
|
Installment sales |
($8,000 |
45% |
|
$3,600 |
|
Warranty costs |
( (5,000) |
45% |
$(2,250) |
|
|
Totals |
$3,000 |
|
$(2,250) |
$3,600* |
*Because
all deferred taxes were computed at the same rate, these totals can be
reconciled as follows: $3,000 X 45% =
$(2,250) + $3,600.
Deferred
tax liability at the end of 2004 $(3,600
Deferred
tax liability at the beginning of 2004 7,200
Deferred
tax benefit for 2004 (decrease
required in deferred tax liability) $(3,600)
Deferred
tax asset at the end of 2004 $2,250
Deferred
tax asset at the beginning of 2004 4,500
Deferred
tax expense for 2004 (decrease
required in deferred tax asset) $2,250
Deferred tax
benefit for 2004 $
(3,600)
Deferred
tax expense for 2004 2,250
Net deferred
tax benefit for 2004 (1,350)
Current
tax expense for 2004 95,850
Income
tax expense for 2004 $94,500
Journal
entry at December 31, 2005:
Income
Tax Expense....................................................................................... 40,500
Deferred
Tax Liability.......................................................................................
3,600
Income
Tax Payable......................................................................................... 41,850
Deferred
Tax Asset........................................................................................... 2,250
Taxable
income for 2005 $93,000
Enacted
tax rate 45%
Income
tax payable for 2005 $41,850
Deferred
tax liability at the end of 2005 $( 0
Deferred
tax liability at the beginning of 2005 3,600
Deferred
tax benefit for 2005 (decrease
required in deferred tax liability) $(3,600)
Deferred
tax asset at the end of 2005 $ 0
Deferred
tax asset at the beginning of 2005 2,250
Deferred
tax expense for 2005 (decrease
required in deferred tax asset) $2,250
Deferred tax
benefit for 2005 $
(3,600)
Deferred
tax expense for 2005 2,250
Net deferred
tax benefit for 2005 (1,350)
Current
tax expense for 2005 41,850
Income
tax expense for 2005 $40,500
EXERCISE 19-24
(a) 2002
Income
Tax Expense.................................................................................... 48,000
Income
Tax Payable ($120,000 X 40%)........................................................ 48,000
2003
Income
Tax Expense.................................................................................... 36,000
Income
Tax Payable ($90,000 X 40%).......................................................... 36,000
2004
Income
Tax Refund Receivable................................................................... 84,000
Deferred
Tax Asset....................................................................................... 31,500
Benefit
Due to Loss Carryback..................................................................... 84,000*
Benefit
Due to Loss Carryforward................................................................. 31,500**
**[40% X $(120,000)] + [40% X $(90,000)] = $84,000
**45%
X ($280,000 – $120,000 – $90,000) = $31,500
Benefit
Due to Loss Carryforward................................................................ 15,750
Allowance
to Reduce Deferred Tax Asset
to Expected Realizable Value.................................................................... 15,750
(50% X $31,500)
2005
Income
Tax Expense.................................................................................... 54,000
Deferred
Tax Asset........................................................................................ 31,500
Income
Tax Payable...................................................................................... 22,500
[($120,000 – $70,000) X 45%]
Allowance
to Reduce Deferred Tax Asset
to Expected Realizable Value................................................................... 15,750
Benefit
Due to Loss Carryforward................................................................. 15,750
(b) Operating
loss before income taxes $(280,000)
Income
tax benefit
Benefit
due to loss carryback $84,000
Benefit
due to loss carryforward 15,750 99,750
Net loss $(180,250)
(c) Income
before income taxes $120,000
Income
tax expense
Current $22,500
Deferred 31,500
Benefit
due to loss carry-
forward
(15,750) 38,250
Net
income $ 81,750
|
PROBLEM 19-7 |
(a) Before deferred taxes can
be computed, the amount of cumulative temporary difference existing at the end
of each year must be computed:
|
|
2003 |
2004 |
2005 |
|
Pretax financial income |
$130,000 |
($70,000 |
($70,000 |
|
Taxable income |
90,000 |
( 90,000 |
( 90,000 |
|
Temporary
difference originating (reversing) |
40,000 |
( (20,000) |
(20,000) |
|
Cumulative
temporary difference at the beginning of the year |
0 |
( 40,000 |
20,000 |
|
Cumulative
temporary difference at the end of the year |
$ 40,000 |
( $20,000 |
( $ 0 |
2003
Income
Tax Expense...................................................................................... 45,500
Income
Tax Payable........................................................................................ 31,500
Deferred
Tax Liability....................................................................................... 14,000
Taxable
income for 2003 $90,000
Enacted
tax rate for 2003 35%
Current tax
expense for 2003 (Income tax payable) $31,500
|
|
Temporary
Difference |
Future Taxable
(Deductible) Amounts |
Tax Rate |
December 31, 2004 |
|
|
Deferred Tax |
|||||
|
(Asset) |
Liability |
||||
|
|
Installment Accounts Receivable |
( $ 40,000) |
35%a |
|
$14,000 |
aTax
rate enacted for 2003.
Deferred tax
liability at the end of 2003 $14,000
Deferred tax
liability at the beginning of 2003 0
Deferred tax
expense for 2003 (increase in
deferred tax liability) $14,000
Deferred tax expense for 2003 $14,000
Current
tax expense for 2003 (Income tax payable) 31,500
Income
tax expense for 2003 $45,500
2004
Deferred
Tax Liability......................................................................................
2,000
Income
Tax Expense....................................................................................... 2,000*
(To record the adjustment for the
decrease in the enacted tax rate)
Income
Tax Expense...................................................................................... 21,000
Deferred
Tax Liability......................................................................................
6,000
Income
Tax Payable........................................................................................ 27,000
*Cumulative
temporary difference at the end of 2003 $40,000
Newly
enacted tax rate for future year 30% Adjusted
balance of deferred tax liability at the end
of 2003 12,000
Current
balance of deferred tax liability 14,000
Adjustment
due to decrease in enacted tax rate $
(2,000)
Taxable
income for 2004 $90,000
Enacted
tax rate for 2004 30%
Current
tax expense for 2004 (Income tax payable) $27,000
|
Temporary Difference |
Future Taxable
(Deductible) Amounts |
Tax Rate |
Deferred Tax |
|
|
(Asset) |
Liability |
|||
|
Installment
Accounts Receivable |
$20,000 |
30%b |
|
$ 6,000 |
bTax
rate enacted for 2004.
Deferred
tax liability at the end of 2004 $ 6,000
Deferred
tax liability at the beginning of 2004
after adjustment ($14,000 – $2,000) 12,000
Deferred
tax benefit for 2004 (decrease in
deferred tax liability) $
(6,000)
Deferred tax benefit for 2004 $ (6,000)
Current
tax expense for 2004 (Income tax payable) 27,000
Income
tax expense for 2004 $21,000
2005
Income
Tax Expense...................................................................................... 21,000
Deferred
Tax Liability......................................................................................
6,000
Income
Tax Payable........................................................................................ 27,000
Taxable
income for 2005 $90,000
Enacted
tax rate for 2005 30%
Current
tax expense for 2005 (Income tax payable) $27,000
|
|
Temporary
Difference |
Future Taxable
(Deductible) Amounts |
Tax Rate |
December 31, 2004 |
|
|
Deferred Tax |
|||||
|
(Asset) |
Liability |
||||
|
|
Installment Accounts Receivable |
( $—0— |
30% |
|
$—0— |
Deferred
tax liability at the end of 2005 $ 0
Deferred
tax liability at the beginning of 2005 6,000
Deferred
tax benefit for 2005 (decrease in
deferred tax liability) $
(6,000)
Deferred tax
benefit for 2005 $
(6,000)
Current
tax expense for 2005 27,000
Income
tax expense for 2005 $21,000
(b) December
31, 2003
Current
liabilities
Deferred
tax liability $14,000
December
31, 2004
Current
liabilities
Deferred
tax liability $ 6,000
December
31, 2005
There
is no deferred tax liability to be reported at this date.
(c) 2003
Income
before income taxes $130,000
Income
tax expense
Current $31,500
Deferred 14,000 45,500
Net
income $ 84,500
2004
Income
before income taxes $70,000
Income
tax expense
Current $27,000
Deferred (6,000)
Adjustment
due to decrease
in tax rate (2,000) 19,000
Net
income $51,000
2005
Income
before income taxes $70,000
Income
tax expense
Current $27,000
Deferred (6,000) 21,000
Net
income $49,000
|
PROBLEM 19-9 |
(a) Pretax
financial income $100,000
Permanent
differences:
Fine
for pollution 3,500
Tax-exempt
interest (1,400)
Originating
temporary differences:
Excess
warranty expense per books
($5,000 – $2,000) 3,000
Excess
construction profits per books
($92,000 – $62,000) (30,000)
Excess
depreciation per tax
($80,000 – $60,000) (20,000)
Taxable
income $ 55,100
(b)
|
Temporary
Difference |
Future Taxable
(Deductible) Amounts |
Tax Rate |
Deferred Tax |
|
|
(Asset) |
Liability |
|||
|
Warranty
costs |
$ (3,000) |
40% |
$(1,200) |
|
|
Construction
profits |
30,000 |
40% |
|
*$12,000 |
|
Depreciation |
( 20,000 |
40% |
|
* 8,000 |
|
Totals |
($47,000 |
|
$(1,200) |
*$20,000* |
*Because of
a flat tax rate, these totals can be reconciled:
$47,000 X 40% = $(1,200) + $20,000.
(c) Income
Tax Expense...................................................................................... 40,840
Deferred
Tax Asset.........................................................................................
1,200
Deferred
Tax Liability....................................................................................... 20,000
Income
Tax Payable........................................................................................ 22,040
Taxable
income for 2004 [answer part (a)] $55,100
Tax
rate 40%
Income tax
payable for 2004 $22,040
Deferred tax
liability at the end of 2004 [part (b)] $20,000
Deferred tax
liability at the beginning of 2004 0
Deferred tax
expense for 2004 $20,000
Deferred tax asset at the end of
2004 $ 1,200
Deferred
tax asset at the beginning of 2004 0
Deferred tax
benefit for 2004 $
(1,200)
Deferred
tax expense for 2004 $20,000
Deferred tax
benefit for 2004 (1,200)
Net
deferred tax expense for 2004 $18,800
Current
tax expense for 2004 (Income tax payable) $22,040
Deferred
tax expense for 2004 18,800
Income
tax expense for 2004 $40,840
(d) Income
before income taxes $100,000
Income
tax expense
Current $22,040
Deferred 18,800 40,840 Net
income $ 59,160
CASE 19-6
(a) Future taxable
amounts increase taxable income relative to pretax financial income in the
future due to temporary differences existing at the balance sheet date. Future
deductible amounts decrease taxable income relative to pretax financial income
in the future due to existing temporary differences.
A deferred tax liability should be recorded for the deferred
tax consequences attributable to the future taxable amounts scheduled and a
deferred tax asset should be recorded for the deferred tax consequences
attributable to the future deductible amounts scheduled.
(b) The carryback
and carryforward provisions will affect the amounts to be reported for the
resulting deferred tax asset and deferred tax liability.
In computing
deferred tax account balances to be reported at a balance sheet date, the
appropriate enacted tax rate is applied to future taxable and deductible
amounts related to temporary differences existing at the balance sheet date.
In determining the appropriate tax rate, you must make assumptions about
whether the entity will report taxable income or losses in the various future
years expected to be affected by the existing temporary differences. Thus, you
calculate the taxes payable or refundable in the future due to existing
temporary differences. In making these calculations, you apply the provisions
of the tax laws and enacted tax rates for the relevant periods.
For future taxable amounts:
1. If taxable
income is expected in the year that a future taxable amount is scheduled, use
the enacted rate for that future year to calculate the related deferred tax
liability.
2. If
an NOL is expected in the year that a future taxable amount is scheduled, use
the enacted rate of what would be the prior year the NOL would be carried back
to or the enacted rate of the future year to which the carryforward would
apply, whichever is appropriate, to calculate the related deferred tax
liability.
For future deductible amounts:
1. If taxable
income is expected in the year that a future deductible amount is scheduled,
use the enacted rate for that future year to calculate the related deferred tax
asset.
2. If an NOL is expected in the year that a
future deductible amount is scheduled, use the enacted rate of what would be
the prior year the NOL would be carried back to or the enacted rate of the
future year to which the carryforward would apply, whichever is appropriate, to
calculate the related deferred tax asset.