Chapter 19: Accounting for Income Taxes

Deferred Tax Benefit

the increase in the deferred tax asset from the beginning to the end of the accounting period

Deferred Tax Expense

the increase in the deferred tax liability balance from the beginning to the end of the accounting period

Originating Temporary Differences

the initial difference between the book basis and the tax basis of an asset or liability, regardless of whether the tax basis of the asset or liability exceeds or is exceeded by the book basis of the asset or liability

Ivanhoe Corporation purchased a machine on January 2, 2020, for $4200000. The machine has an estimated 5-year life with no salvage value. The straight-line method of depreciation is being used for financial statement purposes and the following MACRS amounts will be deducted for tax purposes: 2020 $840000 2021 1344000 2022 806400 2023 $483000 2024 483000 2025 243600 Assuming an income tax rate of 20% for all years, the net deferred tax liability that should be reflected on Ivanhoe's balance sheet at December 31, 2021 be $0 $71400 $6720 $100800

$100800

At the beginning of 2021; Oriole, Inc. had a deferred tax asset of $15500 and a deferred tax liability of $25500. Pre-tax accounting income for 2021 was $1410000 and the enacted tax rate is 20%. The following items are included in Oriole's pre-tax income: Interest income from municipal bonds $111000 Accrued warranty costs, estimated to be paid in 2022 $251000 Operating loss carryforward $181000 Installment sales profit, will be taxed in 2022 $121000 Prepaid rent expense, will be used in 2022 $55500 What is Oriole, Inc.'s taxable income for 2021? $1192500 $1627500 $2129500 $1410000

$1192500

Crane Co. at the end of 2020, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $840000 Estimated litigation expense 2400000 Installment sales (1920000) Taxable income $1320000 The estimated litigation expense of $2400000 will be deductible in 2022 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $960000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $960000 current and $960000 noncurrent. The income tax rate is 20% for all years.The income tax expense is $960000. $480000. $264000. $168000.

$168000.

Oriole Corporation reported $203000 in revenues in its 2021 financial statements, of which $69000 will not be included in the tax return until 2022. The enacted tax rate is 30% for 2021 and 25% for 2022. What amount should Oriole report for deferred income tax liability in its balance sheet at December 31, 2021? $17250 $50750 $20700 $60900

$17250

Operating income and tax rates for Ivanhoe Company's first three years of operations were as follows: Income Enacted tax rate 2020 $300000 25% 2021 ($900000) 20% 2022 $1580000 30% Assuming that Ivanhoe Company opts to carryback its 2021 NOL, what is the amount of income taxes payable at December 31, 2022? $474000 $294000 $245000 $204000

$294000

Based on the following information, compute 2021 taxable income for Carla Vista Co. assuming that its pre-tax accounting income for the year ended December 31, 2021 is $455000. Future taxable Temporary difference (deductible) amount Installment sales $379000 Depreciation $115000 Unearned rent ($395000) $554000 $356000 $949000 $434000

$356000

Oriole Co. at the end of 2020, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $930000 Estimated litigation expense 2550000 Installment sales (2040000) Taxable income $1440000 The estimated litigation expense of $2550000 will be deductible in 2022 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $1020000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $1020000 current and $1020000 noncurrent. The income tax rate is 20% for all years.The deferred tax liability to be recognized is $288000. $408000. $102000. $204000.

$408000.

Cullumber Company deducts insurance expense of $213000 for tax purposes in 2021, but the expense is not yet recognized for accounting purposes. In 2022, 2023, and 2024, no insurance expense will be deducted for tax purposes, but $71000 of insurance expense will be reported for accounting purposes in each of these years. Cullumber Company has a tax rate of 20% and income taxes payable of $182000 at the end of 2021. There were no deferred taxes at the beginning of 2021.What is the amount of the deferred tax liability at the end of 2021? $36400 $15500 $0 $42600

$42600

Wildhorse Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2021 $3150000 Tax exempt interest (159000) Originating temporary difference (468000) Taxable income $2523000 The temporary difference will reverse evenly over the next 2 years at an enacted tax rate of 30%. The enacted tax rate for 2021 is 20%. What amount should be reported in its 2021 income statement as the current portion of its provision for income taxes? $756900 $630000 $504600 $945000

$504600

Crane Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2021 $2350000 Tax exempt interest (161000) Originating temporary difference (372000) Taxable income $1817000 The temporary difference will reverse evenly over the next 2 years at an enacted tax rate of 30%. The enacted tax rate for 2021 is 25%.In Crane's 2021 income statement, what amount should be reported for total income tax expense? $635800 $587500 $565850 $454250

$565850

Sunland Corporation has a deferred tax asset at December 31, 2022 of $170000 due to the recognition of potential tax benefits of an operating loss carryforward. The enacted tax rates are as follows: 30% for 2019-2021; 25% for 2022; and 20% for 2023 and thereafter. Assuming that management expects that only 50% of the related benefits will actually be realized, a valuation account should be established in the amount of: $25500 $34000 $85000 $29750

$85000

Crane Co. at the end of 2020, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $840000 Estimated litigation expense 2400000 Installment sales (1920000) Taxable income $1320000 The estimated litigation expense of $2400000 will be deductible in 2022 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $960000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $960000 current and $960000 noncurrent. The income tax rate is 20% for all years.The deferred tax asset to be recognized is $0. $96000 current. $480000 current. $96000 noncurrent.

$96000 noncurrent.

Oriole Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2021 $1350000 Tax exempt interest (141000) Originating temporary difference (332000) Taxable income $877000 The temporary difference will reverse evenly over the next 2 years at an enacted tax rate of 30%. The enacted tax rate for 2021 is 25%.What amount should be reported in its 2021 income statement as the deferred portion of income tax expense? $118250 credit $99600 debit $118250 debit $99600 credit

$99600 debit

Teal Corp. has a deferred tax asset account with a balance of $78,400 at the end of 2019 due to a single cumulative temporary difference of $392,000. At the end of 2020, this same temporary difference has increased to a cumulative amount of $478,000. Taxable income for 2020 is $884,000. The tax rate is 20% for all years. No valuation account related to the deferred tax asset is in existence at the end of 2019. (a) Record income tax expense, deferred income taxes, and income taxes payable for 2020, assuming that it is more likely than not that the deferred tax asset will be realized (b) Assuming that it is more likely than not that $17,200 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2020 to record the valuation account

(a) Deferred Tax Asset 17200 Income Tax Expense 159600 Income Tax Payable 176800 (b) Income Tax Expense 17200 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value 17200

Windsor Corp. has a deferred tax asset account with a balance of $74,440 at the end of 2019 due to a single cumulative temporary difference of $372,200. At the end of 2020, this same temporary difference has increased to a cumulative amount of $450,400. Taxable income for 2020 is $757,900. The tax rate is 20% for all years. At the end of 2019, Windsor Corp. had a valuation account related to its deferred tax asset of $44,800. (a) Record income tax expense, deferred income taxes, and income taxes payable for 2020, 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 2020, assuming that it is more likely than not that none of the deferred tax asset will be realized.

(a) Deferred Tax Asset 15640 Income Tax Expense 135940 Income Tax Payable 151580 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value 44800 Income Tax Expense 44800 (b) Income Tax Expense 135940 Deferred Tax Asset 15640 Income Tax Payable 151580 Income Tax Expense 45280 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value 45280

An example of a permanent difference is proceeds from life insurance on officers. interest expense on money borrowed to invest in municipal bonds. insurance expense for a life insurance policy on officers. All of these answers are correct as they are all examples of permanent differences

All of these answers are correct as they are all examples of permanent differences

Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income? Interest received on a municipal obligation. Prepaid royalty received in advance. An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes. Subscriptions received in advance.

An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes.

Concord Inc.'s only temporary difference at the beginning and end of 2019 is caused by a $3,150,000 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 2020 and 2021. The related deferred tax liability at the beginning of the year is $1,260,000. In the third quarter of 2019, a new tax rate of 20% is enacted into law and is scheduled to become effective for 2021. Taxable income for 2019 is $5,250,000, and taxable income is expected in all future years. Determine the amount reported as a deferred tax liability at the end of 2019. Deferred tax liability = ? Prepare the journal entry necessary to adjust the deferred tax liability when the new tax rate is enacted into law.

Deferred Tax Liability 945000 Deferred Tax Liability 315000 Income Tax Expense 315000

Which of the following differences would result in future taxable amounts? Expenses or losses that are tax deductible before they are recognized in financial income. Revenues or gains that are recognized in financial income but are never included in taxable income. Revenues or gains that are taxable before they are recognized in financial income. Expenses or losses that are tax deductible after they are recognized in financial income

Expenses or losses that are tax deductible before they are recognized in financial income.

Which of the following temporary differences results in a deferred tax asset in the year the temporary difference originates? I. Accrual for product warranty liability. II. Subscriptions received in advance. III. Prepaid insurance expense. II only. III only. I and III only. I and II only.

I and II only.

Which of the following will not result in a temporary difference? Installment sales Interest received on municipal obligations. Product warranty liabilities Advance rental receipts

Interest received on municipal obligations.

Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income? Depreciable property. Fines and expenses resulting from a violation of law. Product warranty liabilities. Prepaid expenses that are deducted on the tax return in the period paid

Product warranty liabilities.

Loss Carryforward

a company may carry the net operating loss forward indefinitely to offset future taxable income and reduce taxes payable in future years

Stuart Corporation's taxable income differed from its accounting income computed for this past year. An item that would create a permanent difference in accounting and taxable incomes for Stuart would be a balance in the Unearned Rent account at year end. using accelerated depreciation for tax purposes and straight-line depreciation for book purposes. a fine resulting from violations of OSHA regulations. making installment sales during the year.

a fine resulting from violations of OSHA regulations.

"More Likely Than Not"

a level of likelihood of at least slightly more than 50%

Recognizing a valuation allowance for a deferred tax asset requires that a company pass a recognition threshold, after assuming that it will be audited by taxing authorities. consider all positive and negative information in determining the need for a valuation allowance. take an aggressive approach in its tax planning. consider only the positive information in determining the need for a valuation allowance.

consider all positive and negative information in determining the need for a valuation allowance.

Deductible Amounts

decrease taxable income in future years

Reversing Difference

eliminating a temporary difference that originated in prior periods and then removing the related tax effect from the deferred tax account

Pretax Financial Income

income before taxes

The deferred tax expense is the increase in balance of deferred tax liability minus the increase in balance of deferred tax asset. decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability. increase in balance of deferred tax liability from the beginning to the end of the accounting period. increase in balance of deferred tax asset minus the increase in balance of deferred tax liability.

increase in balance of deferred tax liability from the beginning to the end of the accounting period.

Taxable Amounts

increase taxable income in future years

Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a deferred tax liability on the balance sheet? I. A revenue is deferred for financial reporting purposes but not for tax purposes. II. A revenue is deferred for tax purposes but not for financial reporting purposes. III. An expense is deferred for financial reporting purposes but not for tax purposes. IV. An expense is deferred for tax purposes but not for financial reporting purposes. items II and III only. item II only. items I and II only. items I and IV only.

items II and III only.

Net Operating Loss (NOL)

occurs in a year when tax deductible expenses exceed taxable revenues

Companies are permitted to offset any balances in income taxes payable against deferred tax liabilities balances. income tax expense. deferred tax assets balances. related income tax refund receivable or prepaid income taxes balances.

related income tax refund receivable or prepaid income taxes balances.

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset. handled retroactively in accordance with the guidance related to changes in accounting principles. reported as an adjustment to income tax expense in the period of change. applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax rate change, but not subsequent to the date of the change.

reported as an adjustment to income tax expense in the period of change.

Deferred Tax Liability

represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year; the deferred tax consequences attributable to taxable temporary differences

Deferred Tax Asset

represents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences existing at the end of the current year; a deferred tax consequence attributable to deductible temporary differences

Permanent Differences

result from items that enter into pretax financial income but never into taxable income or enter into taxable income but never into pretax financial income

A major distinction between temporary and permanent differences is temporary differences occur frequently, whereas permanent differences occur only once. temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse. once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference can change in status with the passage of time. permanent differences are not representative of acceptable accounting practice

temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse.

Deductible Temporary Differences

temporary differences that will result in deductible amounts in future years, when the related book liabilities are settled

Taxable Temporary Difference

temporary differences that will result in taxable amounts in future years when the related assets are recovered

Current Tax Expense

the amount of income taxes payable for the period

Taxable Income

the amount used to compute income taxes payable

Temporary Difference

the difference between the tax basis of an asset or liability and its carrying or book amount in the financial statements

Temporary Differences

the difference between the tax basis of an asset or liability and its reported carrying or book amount in the financial statements that will result in taxable amounts or deductible amounts in future years

Recognition of tax benefits in the loss year due to a loss carryforward requires the establishment of an income tax refund receivable. the establishment of a deferred tax liability. the establishment of a deferred tax asset. only a note to the financial statements.

the establishment of a deferred tax asset.