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Chapter 19: Question 2BE (page 1093)

Oxford Corporation began operations in 2017 and reported pretax financial income of \(225,000 for the year. Oxford’s tax depreciation exceeded its book depreciation by \)40,000. Oxford’s tax rate for 2017 and years thereafter is 30%. In its December 31, 2017, balance sheet, what amount of deferred tax liability should be reported?

Short Answer

Expert verified

Deferred tax liabilityis a term used when an organizationowns a tax amount, but the authority'spayment has not been made yet. It is reputed under thebalance sheet.

Step by step solution

01

Given the amounts as

Particulars

Amount

Pretax financial income

$225,000

Depreciation

$40,000

Tax rate

30%

02

Calculation of deferred tax liability

DeferredTaxLiability=ExcessDepreciation×TaxRate=$40,000×30%=$12,000

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Most popular questions from this chapter

The following information has been obtained for Gocker Corporation.

1. Prior to 2017, taxable income and pretax financial income were identical.

2. Pretax financial income is \(1,700,000 in 2017 and \)1,400,000 in 2018.

3. On January 1, 2017, equipment costing \(1,200,000 is purchased. It is to be depreciated on a straight-line basis over 5 years for tax purposes and over 8 years for financial reporting purposes. (Hint: Use the half-year convention for tax purposes, as discussed in Appendix 11A.)

4. Interest of \)60,000 was earned on tax-exempt municipal obligations in 2018.

5. Included in 2018 pretax financial income is a gain on discontinued operations of $200,000, which is fully taxable.

6. The tax rate is 35% for all periods.

7. Taxable income is expected in all future years.

Instructions (a) Compute taxable income and income taxes payable for 2018. (b) Prepare the journal entry to record 2018 income tax expense, income taxes payable, and deferred taxes. (c) Prepare the bottom portion of Gocker’s 2018 income statement, beginning with “Income from continuing operations before income taxes.” (d) Indicate how deferred income taxes should be presented on the December 31, 2018, balance sheet.

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.”

Which of the following is false? (a) Under GAAP, deferred taxes are reported based on the classification of the asset or liability to which it relates. (b) Under IFRS, all potential liabilities must be recognized. (c) Under GAAP, the enacted tax rate is used to measure deferred tax assets and liabilities. (d) Under IFRS, all deferred tax assets and liabilities are classified as non-current.

Button Company has the following two temporary differences between its income tax expense and income taxes payable2017 2018 2019 Pretax financial income \(840,000 \)910,000 \(945,000 Excess depreciation expense on tax return (30,000) (40,000) (10,000) Excess warranty expense in financial income 20,000 10,000 8,000 Taxable income \)830,000 \(880,000 \)943,000 The income tax rate for all years is 40%. Instructions (a) Assuming there were no temporary differences prior to 2017, prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017, 2018, and 2019. (b) Indicate how deferred taxes will be reported on the 2019 balance sheet. Button’s product warranty is for 12 months. (c) Prepare the income tax expense section of the income statement for 2019, beginning with the line “Pretax financial income.”

How are deferred tax assets and deferred tax liabilities reported on the statement of financial position under IFRS?
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