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Chapter 19: 4Q (page 1092)
Differentiate between an originating temporary difference and a reversing difference.
Income tax is a term used when the government of a country imposes a tax on the total income earned by an individual or a firm so that it can benefit the whole economy.
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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?
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 $
At December 31, 2017, Cascade Company had a net deferred tax liability of \(450,000. An explanation of the items that compose this balance is as follows.
Temporary Differences in Deferred Taxes | Resulting Balances |
1. Excess of tax depreciation over book depreciation. | \)200,000 |
2. Accrual, for book purposes, of estimated loss contingency from pending lawsuit that is expected to be settled in 2018. The loss will be deducted on the tax return when paid. | \( (50,000) |
3. Accrual method used for book purposes and installment method used for tax purposes for an isolated installment sale of an investment. | \)300,000 |
In analyzing the temporary differences, you find that \(30,000 of the depreciation temporary difference will reverse in 2018, and \)120,000 of the temporary difference due to the installment sale will reverse in 2018. The tax rate for all years is 40%.
Instructions
Indicate the manner in which deferred taxes should be presented on Cascade Company’s December 31, 2017, statement of financial position.
Under IFRS: (a) “probable” is defined as a level of likelihood of at least slightly more than 60%. (b) a company should reduce a deferred tax asset when it is likely that some or all of it will not be realized by using a valuation allowance. (c) a company considers only positive evidence when determining whether to recognize a deferred tax asset. (d) deferred tax assets must be evaluated at the end of each accounting period.
(Explain Future Taxable and Deductible Amounts, How Carryback and Carryforward Affects Deferred Taxes) Maria Rodriquez and Lynette Kingston are discussing accounting for income taxes. They are currently studying a schedule of taxable and deductible amounts that will arise in the future as a result of existing temporary differences. The schedule is as follows.
| Future Years | |||||
2017 | 2018 | 2019 | 2020 | 2021 | |
Taxable income | \(850,000 | ||||
Taxable amounts | \)375,000 | \(375,000 | \)375,000 | $375,000 | |
Deductible amounts | (2,400,000) | ||||
Enacted tax rate | 50% | 45% | 40% | 35% | 30% |
Instructions
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