Intermediate Accounting 2

AE 19-10 Income tax expense should be allocated to all of the following except: (See Kieso pages 177 -178 for discussion of intraperiod tax allocation.) a. extraordinary items b. discontinued operations. c. prior period adjustments. d. unusual or infrequent items.

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AE 19-4 Temporary Difference In the current year, Fort Worth Corporation had $100,000 of taxable income at a tax rate of 40%. During the year, the company began offering warranties on its products and has a warranty liability for financial reporting purposes of $10,500 at the end of the year. Warranty expenses are not deductible until paid for income tax purposes. Prepare the journal entry to record the company's income taxes at the end of the year.

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AE 19-5 Originating and Reversing Differences New Braunfels Corporation began operations in 2012 and reports the following amounts of pretax financial income and taxable income for the years 2012 through 2016. The company has only one temporary difference, and only one originating or reversing difference occurs in any single year. The company is subject to a tax rate of 40% for all the years. Pretax Taxable Year Financial Income Income 2012 $290,000 $180,000 2013 320,000 220,000 2014 220,000 260,000 2015 420,000 560,000 2016 490,000 520,000 Instructions 1. Prepare the income tax journal entry for each year. 2. What do you notice about the balance in the deferred taxes over the five years?

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AE 19-6 Under what conditions must a company establish a valuation allowance for a deferred tax asset? Give some examples of positive evidence and negative evidence that would be considered in determining whether a valuation allowance is needed.

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AE 19-7 What is the difference between an operating loss carryback and a loss carryforward? What conceptual issues did the FASB have to address in the accounting for operating loss carrybacks and carryforwards?

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AE19-11 Change in Tax Rates At the end of 2012, Bandera Company reported a deferred tax liability of $680,000 based on an income tax rate of 34%. On June 1, 2013 Congress changed the income tax rate to 40%. Instructions Prepare the journal entry to adjust the company's deferred tax liability for the change in tax rate.

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AE19-12 Uncertain Tax Positions (See Kieso pages 1,168-1,169 and added materials). At the end of the current year, Beaumont Company claims a $400,000 tax credit on its income tax return. The company is uncertain whether the IRS will accept this credit but based on its tax research it determines that it is more likely than not that the IRS will accept all or some of this tax credit. The Company estimates the following probability distribution of the estimated outcomes. Probability Cumulative Dollar Amount Upheld Probability $150,000 25% 25% 100,000 50 75 50,000 25 100 Instructions For the current year, determine the amount that the Company will recognize as a current tax benefit.

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AE 19-2 What is interperiod tax allocation versus intraperiod tax allocation? (See Kieso pages 177 -178 for intraperiod tax allocation).

An intraperiod tax allocation is the allocation of income taxes to different parts of the results appearing in the income statement of a business, so that some items are stated net of tax. This situation arises in the following cases: Continuing operations (results of) are presented net of tax Discontinued operations are presented net of tax Extraordinary items are presented net of tax Prior period adjustments are presented net of tax The cumulative effect of a change in accounting principle is presented net of tax The intraperiod tax allocation concept is used to reveal the "true" results of certain transactions net of all effects, rather than disaggregating them from income taxes. The reason for using intraperiod tax allocations is to improve the quality of information presented to the readers of financial statements. Interperiod tax allocation is the temporary difference between the effects of tax policy on the financial reporting of a business and its normal financial reporting as mandated by an accounting framework, such as GAAP or IFRS. There are four types of transactions that can cause a temporary difference, which are: Delayed recognition of taxable income Accelerated recognition of taxable income Delayed recognition of expenses for tax purposes Accelerated recognition of expenses for tax purposes

AE 19-1 What are the differences in objectives between financial reporting and the Internal Revenue Code?

Cash-based vs accrual-based; conservatism vs. none; deferral system; treatment of depreciation; matching principle vs. none

AE 19-3 Which of the following is not an example of a permanent difference? a. Fines b. Life insurance proceeds c. Interest on municipal bonds d. Direct write-off of bad debts for tax

Direct write-off of bad debts for tax

AE 19-9 Intraperiod Tax Allocation (See Kieso pages 177 -178 for discussion of intraperiod tax allocation.) The Tyler Company reports the following information for the year ended December 31, 2012: Pretax income from continuing operations (a) $370,000 Pretax loss due to flood damage--extraordinary item (65,000) Pretax income from operations whole sale division 75,000 Pretax loss on disposal of whole sale division (150,000) Total income tax (b) 92,000 a. Assume the tax rate that is applicable to all of the items of income and loss is 40%. Instructions Prepare the bottom part of the 2012 income statement and disclose the tax effects on all items required to be net of taxes.

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AE19-8 Operating Loss At the end of 2012, its first year of operations, the Stephensville Company reported a pretax operating loss of ($50,000) for both financial reporting and income tax purposes. At that time the company had no positive verifiable evidence that it would earn future taxable income. However, due to successful management, the company reported pretax operating income (and taxable income) of $80,000 in 2013. During both years, the income tax rate was 40% and there was no enacted change in tax rates for future years. Instructions 1. Prepare the income tax journal entries of the Stephensville Company at the end of 2012 and 2013. 2. Prepare the lower portion of Stephensville's 2013 income statement

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