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Chapter 19: 3CA_a (page 1106)

The asset-liability approach for recording deferred income taxes is an integral part of generally accepted accounting principles.

Instructions (a) Indicate whether each of the following independent situations should be treated as a temporary difference or as a permanent difference, and explain why. (1) Estimated warranty costs (covering a 3-year warranty) are expensed for financial reporting purposes at the time of sale but deducted for income tax purposes when paid. (2) Depreciation for book and income tax purposes differs because of different bases of carrying the related property, which was acquired in a trade-in. The different bases are a result of different rules used for book and tax purposes to compute the basis of property acquired in a trade-in. (3) A company properly uses the equity method to account for its 30% investment in another company. The investee pays dividends that are about 10% of its annual earnings. (4) A company reports a gain on an involuntary conversion of a nonmonetary asset to a monetary asset. The company elects to replace the property within the statutory period using the total proceeds so the gain is not reported on the current year’s tax return.

Short Answer

Expert verified

Dividends are the type of payment earned by an investor against the shares purchased or money invested in the form of equity shares in an organization. It is paid out of the organization'stotal profits.

Step by step solution

01

(1) Temporary difference

The amount of estimated warranty costs for three years (total) will eventually decrease the organization's pretax financial income. On the other hand, it will also reduce the total taxable income. It is regarded as a future deductible amount and will increase the amount of deferred tax assets.

02

(2) Temporary difference

The variation in the amounts of tax basis and the book basis while computing the income tax expense will decrease the taxable amount because of the depreciation on the value of an asset.

03

(3) Temporary difference and permanent difference

The share of earnings by an investor will be added to the amount of pretax financial income of an organization in which 80% of the amount will be listed under the permanent difference and 10% of the earnings (out of 20% of dividends) will be reported under the temporary difference. It is because of the distributions made by the investor for 10% of the earnings.

04

(4) Temporary difference

As per the rule prescribed by IFRS, if an organization incurs any gain due to an involuntary conversion into the qualitative value of assets, it must be recognized during the conversion period. The difference in the amounts of replacement cost and the carrying value of assets will lead to additional taxable income.

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Most popular questions from this chapter

During 2017, Kate Holmes Co.’s first year of operations, the company reports pretax financial income at \(250,000. Holmes’s enacted tax rate is 45% for 2017 and 40% for all later years. Holmes expects to have taxable income in each of the next 5 years. The effects on future tax returns of temporary differences existing at December 31, 2017, are summarized as follows. Future Years 2018 2019 2020 2021 2022 Total Future taxable (deductible) amounts: Installment sales \)32,000 \(32,000 \)32,000 \( 96,000 Depreciation 6,000 6,000 6,000 \)6,000 \(6,000 30,000 Unearned rent (50,000) (50,000) (100,000) Instructions (a) Complete the schedule below to compute deferred taxes at December 31, 2017. (b) Compute taxable income for 2017. (c) Prepare the journal entry to record income taxes payable, deferred taxes, and income tax expense for 2017. Future Taxable December 31, 2017 (Deductible) Tax Deferred Tax Temporary Difference Amounts Rate (Asset) Liability Installment sales \) 96,000 Depreciation 30,000 Unearned rent (100,000) Totals $

The following information was disclosed during the audit of Elbert Inc. 1. Amount Due Year per Tax Return 2017 \(130,000 2018 104,000 2. On January 1, 2017, equipment costing \)600,000 is purchased. For financial reporting purposes, the company uses straight-line depreciation over a 5-year life. For tax purposes, the company uses the elective straight-line method over a 5-year life. (Hint: For tax purposes, the half-year convention as discussed in Appendix 11A must be used.) 3. In January 2018, \(225,000 is collected in advance rental of a building for a 3-year period. The entire \)225,000 is reported as taxable income in 2018, but \(150,000 of the \)225,000 is reported as unearned revenue in 2018 for financial reporting purposes. The remaining amount of unearned revenue is to be recognized equally in 2019 and 2020. 4. The tax rate is 40% in 2017 and all subsequent periods. (Hint: To find taxable income in 2017 and 2018, the related income taxes payable amounts will have to be “grossed up.”) 5. No temporary differences existed at the end of 2016. Elbert expects to report taxable income in each of the next 5 years. Instructions (a) Determine the amount to report for deferred income taxes at the end of 2017, and indicate how it should be classified on the balance sheet. (b) Prepare the journal entry to record income taxes for 2017. (c) Draft the income tax section of the income statement for 2017, beginning with “Income before income taxes.” (Hint: You must compute taxable income and then combine that with changes in cumulative temporary differences to arrive at pretax financial income.) (d) Determine the deferred income taxes at the end of 2018, and indicate how they should be classified on the balance sheet. (e) Prepare the journal entry to record income taxes for 2018. (f) Draft the income tax section of the income statement for 2018, beginning with “Income before income taxes.”

Bandung Corporation began 2017 with a \(92,000 balance in the Deferred Tax Liability account. At the end of 2017, the related cumulative temporary difference amounts to \)350,000, and it will reverse evenly over the next 2 years. Pretax accounting income for 2017 is \(525,000, the tax rate for all years is 40%, and taxable income for 2017 is \)405,000. Instructions (a) Compute income taxes payable for 2017. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017. (c) Prepare the income tax expense section of the income statement for 2017 beginning with the line “Income before income taxes.”

Andy McDowell Co. establishes a \(100 million liability at the end of 2017 for the estimated site-cleanup costs at two of its manufacturing facilities. All related closing costs will be paid and deducted on the tax return in 2018. Also, at the end of 2017, the company has \)50 million of temporary differences due to excess depreciation for tax purposes, \(7 million of which will reverse in 2018. The enacted tax rate for all years is 40%, and the company pays taxes of \)64 million on \(160 million of taxable income in 2017. McDowell expects to have taxable income in 2018. Instructions (a) Determine the deferred taxes to be reported at the end of 2017. (b) Indicate how the deferred taxes computed in (a) are to be reported on the balance sheet. (c) Assuming that the only deferred tax account at the beginning of 2017 was a deferred tax liability of \)10,000,000, draft the income tax expense portion of the income statement for 2017, beginning with the line “Income before income taxes.” (Hint: You must first compute (1) the amount of temporary difference underlying the beginning $10,000,000 deferred tax liability, then (2) the amount of temporary differences originating or reversing during the year, and then (3) the amount of pretax financial income.)

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.
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