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Chapter 19: Q9E (page 1097)

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.

Short Answer

Expert verified

Answer

BELMONT COMPANY

Balance sheet

As on December 31, 2016

Non current liabilities

  • Deferred tax liability

$375,000

Current Liability

  • Deferred tax liability

$0

Step by step solution

01

 Step 1: Meaning of Deferred Tax

Deferred tax is a tax imposed on companies, either deducted in advance or is eligible for an adjustment in future periods. It may be either a deferred tax asset or liability.

02

Clasification of deferred tax account

Step 5: Clasification of deferred tax account

Resulting Deferred tax

Temporary difference

(Asset)

Liability

Depreciation

$200,000

Lawsuit obligation

($50,000)

Installment sale

$225,000

Totals

($50,000)

$425,000

The deferred tax assets are ($50,000), and the deferred tax liability is $425,000, so the net deferred tax liability is $375,000.

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Most popular questions from this chapter

Explain the difference between pretax financial income and taxable income.

Question: Novotna Inc.’s only temporary difference at the beginning and end of 2016 is caused by a \(3 million deferred gain for tax purposes for an installment sale of a plant asset, and the related receivable (only one-half of which is classified as a current asset) is due in equal installments in 2017 and 2018. The related deferred tax liability at the beginning of the year is \)1,200,000. In the third quarter of 2016, a new tax rate of 34% is enacted into law and is scheduled to become effective for 2018. Taxable income for 2016 is $5,000,000, and taxable income is expected in all future years.

Instructions

(a) Determine the amount reported as a deferred tax liability at the end of 2016. Indicate proper classification(s).

(b) Prepare the journal entry (if any) necessary to adjust the deferred tax liability when the new tax rate is enacted into law.

(c) Draft the income tax expense portion of the income statement for 2016. Begin with the line “Income before income taxes.” Assume no permanent differences exist.

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 information is available for Wenger Corporation for 2016 (its first year of operations). 1. Excess of tax depreciation over book depreciation, \(40,000. This \)40,000 difference will reverse equally over the years 2017–2020. 2. Deferral, for book purposes, of \(20,000 of rent received in advance. The rent will be recognized in 2017. 3. Pretax financial income, \)300,000. 4. Tax rate for all years, 40%. Instructions (a) Compute taxable income for 2016. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016. (c) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming taxable income of $325,000.

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. Instructions (a) Explain the objectives of accounting for income taxes in general-purpose financial statements.
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