Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 19: Question 1E (page 1094)

South Carolina Corporation has one temporary difference at the end of 2017 that will reverse and cause taxable amounts of \(55,000 in 2018, \)60,000 in 2019, and \(65,000 in 2020. South Carolina’s pretax financial income for 2017 is \)300,000, and the tax rate is 30% for all years. There are no deferred taxes at the beginning of 2017. Instructions (a) Compute taxable income and income taxes payable 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.”

Short Answer

Expert verified

Theincome tax expense sectionof the financial statement records the amounts related to thefirm's income taxes.It includes thecurrentas well as thedeferred tax expenseamount.

Step by step solution

01

(a) Computation of taxable income and income taxes payable for 2017.

Particulars

Amount

Pretax financial income for 2017

$300,000

Less: Temporary difference at the end

2018

$55,000

2019

$60,000

2020

$65,000

Taxable income for 2017

$120,000

Multiply: Tax rate

30%

Income taxes payable

36,000

02

Calculation of deferred tax liability

Particulars

2018

2019

2020

Total

Taxable amount

$55,000

$60,000

$65,000

$180,000

Multiply: Tax rate

30%

30%

30%

Deferred tax liability

$16,500

$18,000

$19,500

$54,000

03

(b) Preparation of journal entry

South Carolina Corporation
Journal entry

Date

Particulars

Debit

Credit

2017

Income tax expense

$90,000

Income tax payable

$36,000

Deferred tax liability

$54,000

(To record the income tax expense)

04

(c) Preparation of the income tax expense section of the income statement

South Carolina Corporation
Income Statement

Particulars

Amount

Income before income tax

$300,000

Less: Income tax expense

Current tax expense

$36,000

Deferred tax expense

$54,000

Net income

$210,000

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

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?

The pretax financial income (or loss) figures for Jenny Spangler Company are as follows:

2012- $160,000

2013- 250,000

2014- 80,000

2015- 160,000

2016- 380,000

2017- 120,000

2018- 100,000

Pretax financial income (or loss) and taxable income (loss) were the same for all the given years. Assume a 45% tax rate for 2012 and 2013, and a 40% tax rate for the remaining years. Instructions (a) Prepare the journal entries for the years 2014 to 2018 to record the income tax expense and effects of the net operating loss carrybacks and carryforwards assuming Jenny Spangler Company using the carryback provision. All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.)

Kleckner Company started operations in 2013. Although it has grown steadily, the company reported accumulatedoperating losses of \(450,000 in its first four years in business. In the most recent year (2017), Kleckner appears to haveturned the corner and reported modest taxable income of \)30,000. In addition to a deferred tax asset related to its net operatingloss, Kleckner has recorded a deferred tax asset related to product warranties and a deferred tax liability related to accelerateddepreciation. Given its past operating results, Kleckner has determined that it is not probable that it will realize any of thedeferred tax assets. However, given its improved performance, Kleckner management wonders whether there are any accountingconsequences for its deferred tax assets. They would like you to conduct some research on the accounting for recognitionof its deferred tax asset.

Instructions

Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/).(Click on the IFRS tab and then register for freeeIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser torespond to the following questions. (Provide paragraph citations.)

(a)Briefl y explain to Kleckner management the importance of future taxable income as it relates to the recognition ofdeferred tax assets.

(b)What are the sources of income that may be relied upon in assessing realization of a deferred tax asset?

(c)What are tax-planning strategies? From the information provided, does it appear that Kleckner could employ a taxplanningstrategy in evaluating its deferred tax asset?

Using the information from BE19-2, assume this is the only difference between Oxford’s pretax financial income and taxable income. Prepare the journal entry to record the income tax expense, deferred income taxes, and income taxes payable, and show how the deferred tax liability will be classified on the December 31, 2017, balance sheet.

Lincoln Company has the following four deferred tax items at December 31, 2017. The deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same tax authority.

Temporary difference

Deferred tax asset

Deferred tax liability

Rent collected in advance: recognized when a performance obligation is satisfied for accounting purposes and when received for tax purposes.

\(652,000

Use of straight-line depreciation for accounting purposes and accelerated depreciation for tax purposes.

\)330,000

Recognition of income on installment sales at the time of sale for accounting purposes and during period of collection for tax purposes.

\(64,000

Warranty liabilities: recognized for accounting purposes at time of sale for tax purposes at time paid.

\)37,000

On Lincoln’s December 31, 2017, statement of financial position, it will report:

  1. \(394,000 non-current deferred tax liability and \)689,000 non-current deferred tax asset.
  2. \(330,000 non-current liability and \)625,000 current deferred tax asset.
  3. \(295,000 non-current deferred tax asset.
  4. \)295,000 current tax receivable.
See all solutions

Recommended explanations on Business Studies Textbooks

Corporate Finance

Read Explanation

Operational Management

Read Explanation

Intermediate Accounting

Read Explanation

Introduction to Business

Read Explanation

Nature of Business

Read Explanation

Business Development

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free