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Chapter 19: 1CA_a (page 1106)

The amount of income taxes due to the government for a period of time is rarely the amount reported on the income statement for that period as income tax expense. Instructions (a) Explain the objectives of accounting for income taxes in general-purpose financial statements.

Short Answer

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The finance department prepares the income tax expense section under the income statement to estimate the amount of current and the deferred tax expenses of the organization.

Step by step solution

01

Introduction

Income taxes are a type of revenue for the country's government using which it launches various public welfare programs like hospitals, educational institutions, etc.

02

Objectives of accounting

(1) To estimate the amount of income tax payable for the organizations

(2) To determine any refund generation in case of excess tax the organization pays.

(3) To estimate the amount of deferred tax assets or liabilities recognized under the income tax expense financial statement

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Most popular questions from this chapter

SpamelaHamderson Inc. reports the following pretax income (loss) for both financial reporting purposes and tax purposes. (Assume the carryback provision is used for a net operating loss.) Income (Loss) Tax Rate 2009 \( 29,000 30% 2010 40,000 30 2011 17,000 35 2012 48,000 50 2013 (150,000) 40 2014 90,000 40 2015 30,000 40 2016 105,000 40 2017 (60,000) 45 Year Pretax Income (Loss) Tax Rate 2015 \)120,000 34% 2016 90,000 34 2017 (280,000) 38 2018 220,000 38 The tax rates listed were all enacted by the beginning of 2015. Instructions (a) Prepare the journal entries for the years 2015–2018 to record income tax expense (benefit) and income taxes payable (refundable) and the tax effects of the loss carryback and carryforward, assuming that at the end of 2017 the benefits of the loss carryforward are judged more likely than not to be realized in the future. (b) Using the assumption in (a), prepare the income tax section of the 2017 income statement beginning with the line “Operating loss before income taxes.” (c) Prepare the journal entries for 2017 and 2018, assuming that based on the weight of available evidence, it is more likely than not that one-fourth of the benefits of the loss carryforward will not be realized. (d) Using the assumption in (c), prepare the income tax section of the 2017 income statement beginning with the line “Operating loss before income taxes.”

The following information is available for Remmers Corporation for 2017. 1. Depreciation reported on the tax return exceeded depreciation reported on the income statement by \(120,000. This difference will reverse in equal amounts of \)30,000 over the years 2018–2021. 2. Interest received on municipal bonds was \(10,000. 3. Rent collected in advance on January 1, 2017, totaled \)60,000 for a 3-year period. Of this amount, \(40,000 was reported as unearned at December 31, 2017, for book purposes. 4. The tax rates are 40% for 2017 and 35% for 2018 and subsequent years. 5. Income taxes of \)320,000 are due per the tax return for 2017. 6. No deferred taxes existed at the beginning of 2017. Instructions (a) Compute taxable income for 2017. (b) Compute pretax financial income for 2017. (c) Prepare the journal entries to record income tax expense, deferred income taxes, and income taxes payable for 2017 and 2018. Assume taxable income was $980,000 in 2018. (d) Prepare the income tax expense section of the income statement for 2017, beginning with “Income before income taxes.”

Mitchell Corporation had income before income taxes of \(195,000 in 2017. Mitchell’s current income tax expense is \)48,000, and deferred income tax expense is $30,000. Prepare Mitchell’s 2017 income statement, beginning with Income before income taxes.

Homestake Mining Company is a 120-year-old international gold mining company with substantial gold mining operations and exploration in the United States, Canada, and Australia. At year-end, Homestake reported the following items related to income taxes (thousands of dollars).

Total current taxes

\( 26,349

Total deferred taxes

(39,436)

Total income and mining taxes (the provision for taxes per its income statement)

\) (13,087)

Deferred tax liabilities

\(303,050

Deferred tax assets, net of valuation allowance of \)207,175

95,275

\(207,775


Note 6: The classification of deferred tax assets and liabilities is based on the related asset or liability creating the deferred tax. Deferred taxes not related to a specific asset or liability are classified based on the estimated period of reversal.

Tax loss carry forwards (U.S., Canada, Australia, and Chile)

\)71,151

Tax credit carry forwards

\(12,007

Instructions

  1. What is the significance of Homestake’s disclosure of “Current taxes” of \)26,349 and “Deferred taxes” of \((39,436)?
  2. Explain the concept behind Homestake’s disclosure of gross deferred tax liabilities (future taxable amounts) and gross deferred tax assets (future deductible amounts).
  3. Homestake reported tax loss carry forwards of \)71,151 and tax credit carry forwards of $12,007. How do the carry back and carry forward provisions affect the reporting of deferred tax assets and deferred tax liabilities?

Question: Interest on municipal bonds is referred to as a permanent difference when determining the proper amount to report for deferred taxes. Explain the meaning of permanent differences, and give two other examples.
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