Intermediate accounting chapter 19 exam 3 examples
Dharma Inc. reports the following pretax income (loss) for both book and tax purposes. (Assume the carryback provision is used where possible for a net operating loss.) The tax rates listed were all enacted by the beginning of 2015. Year, Pretax Income (Loss), Tax Rate 2015 120,000 40% 2016 90,000 40% 2017 (280,000) 45% 2018 120,000 45% Prepare the journal entries for years 2015-2018 to record income tax expense (benefit) and income taxes payable (refundable), and the tax effects of the loss carryback and loss carryforward, assuming that based on the weight of available evidence, it is more likely than not that one-half of the benefits of the loss carryforward will not be realized.
2015 Income tax expense 48,000 - Income tax payable 48,000 (120,000 * 0.40) 2016 Income tax expense 36,000 - Income taxes payable 36,000 (90,000 * 0.40) 2017 NOL 2017 (280,000) - losses carried back to 15: 120,000 - losses carried back to 16: 90,000 -------------------------------------- NOL available to CF to 2018 = (70,000) Tax refundable from 2015: 48,000 tax refundable from 2016: 36,000 -------------------------------------- Total taxes refundable in 2017: 84,000 NOL carryforwards at end of 2017 (70,000 * 0.45) = 31,500 DTA = 31,500 Calculation of valuation allowance Deferred tax asset 31,500 Expected uncollect = 50% ------------------------------------ Valuation allowance = 15,750 b) JE to record carryback and forward Income tax refund receivable 84,000 - Benefit due to loss carryback 84,000 DTA 31,500 - Benefit due to loss carryforward 31,500 Benefit due to loss carryforward 15,750 - allowance to reduce DTA to expected realizable value 15,750 2018 entries Income tax expense 54,000 - DTA 31,500 - income tax payable 22,500 (120-70)*0.45 Allowance to reduce DTA 15,750 - benefit due to loss carryforward 15,750
Sawyer Corporation collects rent revenue in advance from tenants. The collection of $50,000 in 2017 is reported as revenue for tax purposes; it will be reported on the income statement in 2018 when it is earned (the only temporary difference). Sawyer's 2017 financial income is $350,000. If the tax rate is 30% for all periods, prepare the journal entry to record income tax expense in 2017. No deferred income taxes existed at the beginning of the year.
DTA - (50,000 * 0.30) = 15,000 Income taxes payable (350,000 + 50,000)* 0.30) = 120,000 JE Debit: - Income tax expense 105,000 - DTA 15,000 Credit: Income taxes payable 120,000
At December 31, 2018, Juliet Corp. had an estimated warranty liability of $105,000 for accounting purposes and $0 for tax purposes. (The warranty costs are not deductible until paid.) This represents the only difference between Juliet's taxable income and financial income. Juliet's taxable income in 2018 is $500,000. The effective tax rate is 40%. No deferred income taxes existed at the beginning of 2018. Prepare the journal entry to record Juliet's deferred tax asset or liability at December 31, 2018.
DTA = 105,000 * 0.40 = 42,000 Income tax payable (500,000 * 0.40) = 200,000 dEBIT: Income tax expense 158,000 DTA 42,000 Credit Income taxes payable 200,000
Pretax financial income for Austen Inc. is $300,000 and its taxable income is $100,000 for 2018. Its only temporary difference at the end of the period relates to a $70,000 difference due to excess depreciation for tax purposes. If the tax rate is 40% for all periods, prepare the journal entry to record income tax expense in 2018. No deferred income taxes existed at the beginning of the year
DTL *(70,000 * 0.40) = 28,000 Income taxes payable = 100,000 * 0.40 = 40,000 JE Debit: - Income tax expense 68,000 Credit: - DTL 28,000 - Income tax payable 40,000
Oceanic Company has a deferred tax liability of $68,000 at the beginning of 2016. At the end of 2016, it reports accounts receivable on the books at $90,000 and the tax basis at zero (its only temporary difference). If the enacted tax rate is 34% for all periods, and income taxes payable for the period is $230,000, determine the amount of total income tax expense to report for 2016.
DTL exists (90,000 * 0.34) = 30,600 - 68,000 = 37,400 Debit: - income tax expense 192,600 - DTL: 37,400 Credit - income taxes payable 230,000
Sayid Corp. has had no permanent or temporary differences since it began operations. Information regarding taxable income and taxes paid is as follows: The tax rate enacted for Year 6 and subsequent years is 25%. Year 1 - taxable income = 60,000 - tax rate = 40% - taxes paid 24,000 Year 2 - TI: 100,000 - TR: 40% - Taxes paid = 24,000 Year 3 -TI: 80,000 - TR: 35% - Taxes paid: 28,000 Year 4 - TI: 160,000 - TR: 35% - TP: 56,000 Year 5 - TI: (300,000) - TR: 30% - TP: 0 (a) Assume the Year 5 NOLs carried back to the extent possible, prepare the journal entry to record the benefits of the carryback and the journal entry to record the expected benefits of any related NOL carryforward. Assume it is likely that the benefits of any carryforward will be fully realized. (b) How are the accounts in the journal entries prepared in (a) to be reported in the financial statements for Year 5? (c) Assume taxable income is $100,000 (before consider the NOL carryforward) in Year 6. Prepare the journal entry to record income taxes.
a) NOL available in current year (300,000) - Losses carried back to Year 3: 80,000 - losses carried back to Year 4: 160,000 --------------------------------------- NOL available to carry forward to year 6: (60,000) Taxes refundable from loss carryback - year 3: 28,000 - year 4: 56,000 -------------------------------- Total refundable taxes = 84,000 NOL carryforwards at end of year 5= 60,000 - enacted future rates (25%) --------------------------------------- DTA = 15,000 JE to record both carryback and forward Income tax refund receviable 84,000 - Benefit due to loss carryback 84,000 Deferred tax asset 15,000 - benefit due to loss carryforward 15,000 *income statement presentation: Operating loss before income taxes: (300,000) - benefits due to loss carryback 84,000 - benefits due to loss carryforward 15,000 total = 99,000 --------------------------------------- Net loss (201,000) c) taxable income is 100,000 in year 6 Income tax expense 25,000 - DTA 15,000 - Income tax payable 10,000 (100,000 - 60,000) * 25%
Linus Company has pretax financial income of $200,000 for 2014 (the first year of operations). The difference between revenues and expenses reported on the tax return for 2014 and the income statement for 2014 are as follows: Dep exp: tax return = 80,000 and income stmt = 62,000 Insurance premiums expense - tax return = 0 - income stmt = 8,000 Warranty expense - tax return = 10,000 - income stmt = 19,000 interest rev from municipal bonds - tax return = 0 - income stmt = 2,000 rent rev - tax return = 6,200 - income stmt = 5,000 (a) Compute taxable income for 2014. (b) Prepare the journal entry to record income taxes for 2014. (assume a 40% tax rate) (c) Prepare the portion of the income statement for 2014 that reports income taxes.
a) 2014 taxable income Permanent differences: - insurance premium expense not deductible 8,000 - interest rev not taxable: (2,000) ---------------------------------------- 6,000 Temporary differences - increase to dep exp (DTL) = (18000) - decrease to warranty exp (DTA) = 9,000 - increase to rent rev (DTA) = 1,200 ---------------------------------------- (7800) 200,000 + 6,000 - 7800 = 198,200 b) Journal entry Debit - income tax expense 82,400 - DTA (9000*0.40) = 3,600 - DTA (1200 * 0.40) = 480 Credit - DTL (18000 * 0.40) = 7200 - Income tax payable (198200 * 0.40) = 79,280 c) income statement presentation Income before income taxes: 200,000 Provision of income taxes - current tax expense 79,280 - deferred tax expense 3,120 (7200 - 3600 - 480) --------------------------------------- (82,400) Net income = 117,600
Widmore Inc. has the following facts available: (1) Pretax financial income for Year 1 is $105,000. (2) Year 1 is the first year of operations. (3) One temporary difference exists at the end of Year 1 that will result in deductible amounts of: $20,000 in Year 2 $30,000 in Year 3 (4) Another temporary difference exists at the end of Year 1 which will result in taxable amounts of: $11,000 in Year 2 $14,000 in Year 3 (5) Tax rates enacted by the end of Year 1 are: 50% for Year 1 40% for Year 2 30% for Year 3 (6) Taxable income is expected in all future years (a) Compute taxable income for Year 1. (b) Prepare the journal entry to record income taxes in Year 1
a) compute taxable income for year 1 - pretax financial income 105,000 *temporary differences - increase related to deductible amounts 50,000 - decrease related to taxable amount in future DTL (25,000) ---------------------------------------- Taxable income = 130,000 b) prepare JE to record income taxes in Year 1 Deductible amounts in future - year 2: 20,000 - year 3: 30,000 - total = 50,000 Enacted tax rates - year 2 = 40% - year 3 = 30% ---------------------------------------- DTA - year 2 8,000 - year 3 9,000 - total = 17,000 Taxable amounts in future - year 2: 11,000 - year 3: 14,000 - total = 25,000 Enacted tax rate - year 2 = 40% - year 3 = 30% DTL - year 2: 4,400 - year 3: 4,200 - total = 8,600 JE Income tax expense 56,600 DTA 17,000 Credit: DTL 8,600 Income taxes payable 65,000 (130,000 * 50%)
Desmond Hume Corp. has a deferred tax asset account with a balance of $150,000 at the end of 2016 due to a single cumulative temporary difference of $375,000. At the end of 2017, this same temporary difference has increased to a cumulative amount of $450,000. Taxable income for 2017 is $820,000. The tax rate is 40% for all years. No valuation account related to the deferred tax asset is in existence at the end of 2016. (a) Record the journal entry for income tax expense for 2017, 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 $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2017 to record the valuation account.
a) cumulative temp different 450,000 X tax rate (40%) ----------------------------------- 180,000 DTA at end of year DTA at end of year 180,000 DTA at beg of year 150,000 --------------------------------------- Current year DT expense (30,000) JE: Debit: - income tax expense 298,000 - DTA: 30,000 Credit - income taxes payable 328,000 (820,000 * 0.40) b) record income tax expense D: Income tax expense 298,000 D: DTA 30,000 C: Income tax payable 328,000 record valuation D: Income tax expense 30,000 C: allowance to reduce DTA to expected realizable value 30,000
