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Chapter 19: Q10E. (page 1097)

The following facts relate to Duncan Corporation. 1. Deferred tax liability, January 1, 2017, \(60,000. 2. Deferred tax asset, January 1, 2017, \)20,000. 3. Taxable income for 2017, \(105,000. 4. Cumulative temporary difference at December 31, 2017, giving rise to future taxable amounts, \)230,000. 5. Cumulative temporary difference at December 31, 2017, giving rise to future deductible amounts, $95,000. 6. Tax rate for all years, 40%. No permanent differences exist. 7. The company is expected to operate profitably in the future. Instructions (a) Compute the amount of pretax financial income 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.” (d) Compute the effective tax rate for 2017.

Short Answer

Expert verified

Deductibles are the amount that an organization can claim while filing their income tax return. It helps the organization in decreasing its total income tax expense.

Step by step solution

01

Computation of originating difference

Particulars

Amount

Cumulative temporary difference at the end

$230,000

Less: Cumulative temporary difference at the beginning ($60,00040%)

$150,000

Originating difference in 2017 (taxable)

$80,000

Particulars

Amount

Cumulative temporary difference at the end

$95,000

Less: Cumulative temporary difference at the beginning ($20,00040%)

$50,000

Originating difference in 2017 (deductible)

$45,000

02

(a) Computation of financial income for 2017.

Particulars

Amount

Originating difference in 2017 (taxable)

$80,000

Less: Originating difference in 2017 (deductible)

$45,000

Add: Taxable income for 2017

$105,000

Pretax financial income for 2017

$140,000

03

(b) Preparation of the journal entry

Date

Particulars

Debit

Credit

2017

Income tax expense ($105,000×40%)

$42,000

Income tax payable

$42,000

(To record the income tax expense)

2017

Deferred tax asset

$20,000

Profit and loss

$20,000

(To record the deferred tax asset)

2017

Profit and loss

$60,000

Deferred tax liability

$60,000

(To record the deferred tax liability)

04

(c) Preparation of the income statement

Income Statement

Particulars

Amount

Income before income taxes

$140,000

Less: Income tax expense

Current expense

$42,000

Deferred expense

$14,000

$56,000

Net Income

$84,000

05

(d) Computation of effective tax rate

Effectivetaxrate=(IncomtaxexpenseIncomebeforeincometax)=($56,000$140,000)=40%

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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 $

Question: (Three Differences, Classify Deferred Taxes) At December 31, 2016, Belmont Company had a net deferred tax liability of \(375,000. An explanation of the items that compose this balance is as follows

Temporary differences

Resulting balance in deferred taxes

  1. Excess of tax depreciation over book depreciation

\)200,000

  1. Accruals, for book purpose, of estimated loss contingency from pending lawsuit that is expected to be settled in 2017. The loss will be deducted on the tax return when paid

(50,000)

  1. Accrual method used for book purposes and installment method used for tax purposes for an isolated installment sale of an investment

225,000

\(375,000

In analyzing the temporary differences, you find that \)30,000 of the depreciation temporary difference will reverse in 2017, and $120,000 of the temporary difference due to the installment sale will reverse in 2017. The tax rate for all years is 40%.

Instructions

Indicate the manner in which deferred taxes should be presented on Belmont Company’s December 31, 2016, balance sheet.

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).

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.)

Addison Co. has one temporary difference at the beginning of 2017 of \(500,000. The deferred tax liability established for this amount is \)150,000, based on a tax rate of 30%. The temporary difference will provide the following taxable amounts: \(100,000 in 2018, \)200,000 in 2019, and $200,000 in 2020. If a new tax rate for 2020 of 20% is enacted into law at the end of 2017, what is the journal entry necessary in 2017 (if any) to adjust deferred taxes?
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