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Chapter 19: Q1CE (page 1109)

Question: Access the glossary (“Master Glossary”) to answer the following.

(a) What is a deferred tax asset?

(b) What is taxable income?

(c) What is the definition of valuation allowance?

(d) What is a deferred tax liability?

Short Answer

Expert verified

Answer:

(a) Deferred tax assets: It means the deduction in the company's future tax liability.

(b) Taxable income: The income accounted for calculating the assessee's tax liability.

(c) Valuation allowance: The amount which reduces the deferred tax assets.

(d) Deferred tax liability: The company needs to pay more tax in the future.

Step by step solution

01

Meaning of Taxes

Taxes means the mandatory contribution to the government. It is a financial charge imposed by the government on the income of the people. Tax can be classified as direct tax and indirect tax.

02

Deferred tax assets

Deferred tax assets are the asset created when the taxable income ismore than the accounting income. It is a future deduction in the tax liability of the company.

03

Taxable Income

Taxable income means the portion of the income charged to the income tax, and taxable income is according to the guidelines of the internal revenue code.

04

Valuation allowance

The valuation allowance is the allowance the companies use to offset the amount of deferred tax asset balance of the company. It is based on the tax asset, which will not likely realize the tax benefits.

05

Deferred tax Liability

The Deferred tax liability is created when the current year's taxable income is less than the company's accounting income. It is adjusted in the future by increasing the future tax amount.

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Most popular questions from this chapter

Nadal Inc. has two temporary differences at the end of 2016. The first difference stems from installment sales, and the second one results from the accrual of a loss contingency. Nadal’s accounting department has developed a schedule of future taxable and deductible amounts related to these temporary differences as follows. 2017 2018 2019 2020 Taxable amounts \(40,000 \)50,000 \(60,000 \)80,000 Deductible amounts (15,000) (19,000) \(40,000 \)35,000 \(41,000 \)80,000 As of the beginning of 2016, the enacted tax rate is 34% for 2016 and 2017, and 38% for 2018–2021. At the beginning of 2016, the company had no deferred income taxes on its balance sheet. Taxable income for 2016 is $500,000. Taxable income is expected in all future years. Instructions (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016. (b) Indicate how deferred income taxes would be classified on the balance sheet at the end of 2016.

In 2017, Amirante Corporation had pretax financial income of \(168,000 and taxable income of \)120,000. The difference is due to the use of different depreciation methods for tax and accounting purposes. The effective tax rate is 40%. Compute the amount to be reported as income taxes payable at December 31, 2017.

Pretax financial income for Lake Inc. is \(300,000, and its taxable income is \)100,000 for 2018. Its only temporary difference at the end of the period relates to a $70,000 difference due to excess depreciation for tax purposes. If the tax rate is 40% for all periods, compute the amount of income tax expense to report in 2018. No deferred income taxes existed at the beginning of the year.

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.”

Rode Inc. incurred a net operating loss of \(500,000 in 2017. Combined income for 2015 and 2016 was \)350,000. The tax rate for all years is 40%. Rode elects the carryback option. Prepare the journal entries to record the benefits of the loss carryback and the loss carryforward. Rode expects to return to profitability in 2018.
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