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Chapter 19: Question 1BE (page 1093)

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.

Short Answer

Expert verified

Financial income is the type of income or revenuean organization earns from its investment into various financial securities that are short-term in nature.

Step by step solution

01

Given are the amounts

Particulars

Amount

Pretax financial income

$168,000

Taxable income

$120,000

Effective tax rate

40%

02

Computation of income tax payable for December 31, 2017

Incometaxpayable=TaxableIncome×Taxrate=$120,000×40%=$48,000

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Most popular questions from this chapter

Taxable income and pretax financial income would be identical for Huber Co. except for its treatments of gross profit on installment sales and estimated costs of warranties. The following income computations have been prepared. Taxable Income 2016 2017 2018 Excess of revenues over expenses (excluding two temporary differences) \(160,000 \)210,000 \(90,000 Installment gross profi t collected 8,000 8,000 8,000 Expenditures for warranties (5,000) (5,000) (5,000) Taxable income \)163,000 \(213,000 \)93,000 Pretax Financial Income Excess of revenues over expenses (excluding two temporary differences) \(160,000 \)210,000 \(90,000 Installment gross profi t recognized 24,000 –0– –0– Estimated cost of warranties (15,000) –0– –0– Income before taxes \)169,000 \(210,000 \)90,000. The tax rates in effect are 2016, 40%; 2017 and 2018, 45%. All tax rates were enacted into law on January 1, 2016. No deferred income taxes existed at the beginning of 2016. Taxable income is expected in all future years. Instructions Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016, 2017, and 2018.

Homestake Mining Company is a 120-year-old international gold mining company with substantial gold mining operations and exploration in the United States, Canada, and Australia. At year-end, Homestake reported the following items related to income taxes (thousands of dollars).

Total current taxes

\( 26,349

Total deferred taxes

(39,436)

Total income and mining taxes (the provision for taxes per its income statement)

\) (13,087)

Deferred tax liabilities

\(303,050

Deferred tax assets, net of valuation allowance of \)207,175

95,275

\(207,775


Note 6: The classification of deferred tax assets and liabilities is based on the related asset or liability creating the deferred tax. Deferred taxes not related to a specific asset or liability are classified based on the estimated period of reversal.

Tax loss carry forwards (U.S., Canada, Australia, and Chile)

\)71,151

Tax credit carry forwards

\(12,007

Instructions

  1. What is the significance of Homestake’s disclosure of “Current taxes” of \)26,349 and “Deferred taxes” of \((39,436)?
  2. Explain the concept behind Homestake’s disclosure of gross deferred tax liabilities (future taxable amounts) and gross deferred tax assets (future deductible amounts).
  3. Homestake reported tax loss carry forwards of \)71,151 and tax credit carry forwards of $12,007. How do the carry back and carry forward provisions affect the reporting of deferred tax assets and deferred tax liabilities?

Youngman Corporation has temporary differences at December 31, 2017, that result in the following deferred taxes.

Deferred tax asset $24,000

Deferred tax liability 69,000

Indicate how these balances would be presented in Youngman’s December 31, 2017, statement of financial position.

Kleckner Company started operations in 2013. Although it has grown steadily, the company reported accumulated operating losses of \(450,000 in its first four years in business. In the most recent year (2017), Kleckner appears to have turned the corner and reported modest taxable income of \)30,000. In addition to a deferred tax asset related to its net operating loss, Kleckner has recorded a deferred tax asset related to product warranties and a deferred tax liability related to accelerated depreciation.

Given its past operating results, Kleckner has established a full valuation allowance for its deferred tax assets. However, given its improved performance, Kleckner management wonders whether the company can now reduce or eliminate the valuation allowance. They would like you to conduct some research on the accounting for its valuation allowance.

Instructions

If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.

  1. Briefly explain to Kleckner management the importance of future taxable income as it relates to the valuation allowance for deferred tax assets.
  2. What are the sources of income that may be relied upon to remove the need for a valuation allowance?
  3. What are tax-planning strategies? From the information provided, does it appear that Kleckner could employ a tax planning strategy to support reducing its valuation allowance?

Assume the same information as E19-12, except that at the end of 2016, Jennifer Capriati Corp. had a valuation account related to its deferred tax asset of $45,000. Instructions (a) Record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming that it is more likely than not that the deferred tax asset will be realized in full. (b) Record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming that it is more likely than not that none of the deferred tax asset will be realized.
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