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Chapter 19: Question 6BE (page 1093)

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?

Short Answer

Expert verified

Income tax expenseis an organization'sexpenditureon itstotal revenue.Theeffective tax rateon theincome slab is multipliedto obtain thetax amount.

Step by step solution

01

Given the amounts as

Particulars

Amount

Deferred tax asset for 2017

$30,000

Deferred tax asset for 2018

$59,000

Current tax expense

$61,000

02

Computation of income tax expense for 2018

Particulars

Amount

Deferred tax asset for 2018

$59,000

Less: Deferred tax asset for 2017

$30,000

Deferred tax benefit for 2018

($29,000)

Add: Current tax expense

$61,000

Income tax expense for 2018

$32,000

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Most popular questions from this chapter

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.

(Explain Future Taxable and Deductible Amounts, How Carryback and Carryforward Affects Deferred Taxes) Maria Rodriquez and Lynette Kingston are discussing accounting for income taxes. They are currently studying a schedule of taxable and deductible amounts that will arise in the future as a result of existing temporary differences. The schedule is as follows.

Future Years

2017

2018

2019

2020

2021

Taxable income

\(850,000

Taxable amounts

\)375,000

\(375,000

\)375,000

$375,000

Deductible amounts

(2,400,000)

Enacted tax rate

50%

45%

40%

35%

30%

Instructions

  1. Explain the concept of future taxable amounts and future deductible amounts as illustrated in the schedule.
  2. How do the carryback and carryforward provisions affect the reporting of deferred tax assets and deferred tax liabilities?

Crosley Corp. sold an investment on an installment basis. The total gain of \(60,000 was reported for financial reporting purposes in the period of sale. The company qualifies to use the installment-sales method for tax purposes. The installment period is 3 years; one-third of the sale price is collected in the period of sale. The tax rate was 40% in 2017, and 35% in 2018 and 2019. The 35% tax rate was not enacted in law until 2018. The accounting and tax data for the 3 years is shown below. Financial Tax Accounting Return 2017 (40% tax rate) Income before temporary difference \) 70,000 \(70,000 Temporary difference 60,000 20,000 Income \)130,000 \(90,000 2018 (35% tax rate) Income before temporary difference \) 70,000 \(70,000 Temporary difference –0– 20,000 Income \) 70,000 \(90,000 2019 (35% tax rate) Income before temporary difference \) 70,000 \(70,000 Temporary difference –0– 20,000 Income \) 70,000 $90,000 Instructions (a) Prepare the journal entries to record the income tax expense, deferred income taxes, and the income taxes payable at the end of each year. No deferred income taxes existed at the beginning of 2017. (b) Explain how the deferred taxes will appear on the balance sheet at the end of each year. (c) Draft the income tax expense section of the income statement for each year, beginning with “Income before income taxes.”

Question: Access the glossary (“Master Glossary”) to answer the following.

(a) What is a deferred tax asset?

(b) What is taxable income?

(c) What is the definition of valuation allowance?

(d) What is a deferred tax liability?

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?
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