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Chapter 19: Q5CA-1 (page 1052)

Question: At December 31, 2017, Higley Corporation has one temporary difference which will reverse and cause taxable amounts in 2018. In 2017, a new tax act set taxes equal to 45% for 2017, 40% for 2018, and 34% for 2019 and years thereafter.

Instructions

Explain what circumstances would call for Higley to compute its deferred tax liability at the end of 2017 by multiplying the cumulative temporary difference by:

(a) 45%.

(b) 40%.

(c) 34%.

Short Answer

Expert verified
  1. The cumulative temporary difference is multiplied by 45% when the temporary difference gets reversed in 2017
  2. The deferred tax liability is computed by multiplying the temporary difference by 40% when the temporary difference is reversed in 2018
  3. In case, the temporary difference is reversed in 2019, the deferred tax liability is calculated by multiplying the temporary difference by the 34%

Step by step solution

01

Meaning of Income Tax Rates

The income tax rate means the percentage at which the company’s income shall be taxable. It is a rate specified by the government. It is the percentage of income which is paid to the government

02

The circumstances in which the temporary difference s multiplied by 45% to calculate the deferred tax liability

When the reversal of temporary difference arises in 2017, the deferred tax liability is calculated by multiplying the cumulative difference by 45%

03

The circumstances in which the temporary difference s multiplied by 40% to calculate the deferred tax liability

When the temporary difference is expected to be reversed in 2018, then the deferred tax liability is calculated by multiplying the cumulative difference by 40%.

04

The circumstances in which the temporary difference s multiplied by 34% to calculate the deferred tax liability

When the company expects that the temporary difference arises is reversed and cause taxable in 2019, the deferred tax liability is computed by multiplying the temporary difference by the 34%.

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Most popular questions from this chapter

At December 31, 2017, Percheron Inc. had a deferred tax asset of \(30,000. At December 31, 2018, the deferred tax asset is \)59,000. The corporation’s 2018 current tax expense is $61,000. What amount should Percheron report as total 2018 income tax expense?

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.

Question: What are the two basic requirements applied to the measurement of current and deferred income taxes at the date of the financial statements?

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.)

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.
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