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Chapter 19: 2CA_a (page 1106)

Dexter Company appropriately uses the asset-liability method to record deferred income taxes. Dexter reports depreciation expense for certain machinery purchased this year using the modified accelerated cost recovery system (MACRS) for income tax purposes and the straight-line basis for financial reporting purposes. The tax deduction is the larger amount this year. Dexter received rent revenues in advance this year. These revenues are included in this year’s taxable income. However, for financial reporting purposes, these revenues are reported as unearned revenues, a current liability. Instructions (a) What are the principles of the asset-liability approach?

Short Answer

Expert verified

MACRS, i.e., Modified Accelerated Cost Recovery System, is the type of depreciation system used forfixed assets like machinery so that its purchase cost can be realized upon its depreciation expense.

Step by step solution

01

Introduction

The asset-liability approach under the income tax deals with the following principles while calculating the amount of income tax expense.

02

Principles of the asset-liability approach

  1. The amount of tax expense for the current year will be recognized under the estimated income tax payable.
  2. Organizations should recognize their deferred tax assets and liabilities.
  3. The amount of deferred tax assets should be reduced to recognize the income tax.

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Most popular questions from this chapter

This year, Gumowski Company has each of the following items in its income statement. 1. Gross profits on installment sales. 2. Revenues on long-term construction contracts. 3. Estimated costs of product warranty contracts. 4. Premiums on officers’ life insurance policies with Gumowski as beneficiary. Instructions (a) Indicate where deferred income taxes are reported in the financial statements.

Crosley Corp. sold an investment on an installment basis. The total gain of \(60,000 was reported for financial reporting purposes in the period of sale. The company qualifies to use the installment-sales method for tax purposes. The installment period is 3 years; one-third of the sale price is collected in the period of sale. The tax rate was 40% in 2017, and 35% in 2018 and 2019. The 35% tax rate was not enacted in law until 2018. The accounting and tax data for the 3 years is shown below. Financial Tax Accounting Return 2017 (40% tax rate) Income before temporary difference \) 70,000 \(70,000 Temporary difference 60,000 20,000 Income \)130,000 \(90,000 2018 (35% tax rate) Income before temporary difference \) 70,000 \(70,000 Temporary difference –0– 20,000 Income \) 70,000 \(90,000 2019 (35% tax rate) Income before temporary difference \) 70,000 \(70,000 Temporary difference –0– 20,000 Income \) 70,000 $90,000 Instructions (a) Prepare the journal entries to record the income tax expense, deferred income taxes, and the income taxes payable at the end of each year. No deferred income taxes existed at the beginning of 2017. (b) Explain how the deferred taxes will appear on the balance sheet at the end of each year. (c) Draft the income tax expense section of the income statement for each year, beginning with “Income before income taxes.”

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. (b) Explain the basic principles that are applied in accounting for income taxes at the date of the financial statements to meet the objectives discussed in (a).

Youngman Corporation has temporary differences at December 31, 2017, that result in the following deferred taxes.

Deferred tax asset $24,000

Deferred tax liability 69,000

Indicate how these balances would be presented in Youngman’s December 31, 2017, statement of financial position.

Using the information from BE19-2, assume this is the only difference between Oxford’s pretax financial income and taxable income. Prepare the journal entry to record the income tax expense, deferred income taxes, and income taxes payable, and show how the deferred tax liability will be classified on the December 31, 2017, balance sheet.
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