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CHAPTER 19

Accounting for Income Taxes


OPTIONAL HOMEWORK ASSIGNMENT CHARACTERISTICS TABLE

Item

Description

BE19-3
BE19-12
BE19-13

Journal entries, balance sheet reporting.


Journal entry for NOL carryback.
Journal entries for NOL carryback and carryforward (prior to realization).

E19-2
E19-4
E19-17
E19-20
E19-22
E19-24

Two temporary differences, future deductible amounts.


Three differences, compute taxable income, journal entries.
Two temporary differences, tracked through three years.
Two differences.
Two differences, first year.
NOL carryback and carryforward, valuation account needed.

P19-3
P19-5
P19-9

Second year of depreciation difference, two differences, extraordinary item.


Actual NOL without valuation account.
Five differences, one year, income reporting.

BRIEF EXERCISE 19-3


Depreciation Expense
Tax
Accounting
?
?

Year
2012

Taxable (Deductible) Amount


Current Year
Future Years
$ (40,000)
$ 40,000

Pretax financial income


Excess of tax depreciation over book depreciation
Taxable income

$ 225,000
(40,000 )
$ 185,000

JEs: Current Income Tax Expense .....................................................................


Income Tax Payable ($185,000 X 30%)...........................................

55,500

Deferred Income Tax Expense ..................................................................


Deferred Tax Liability........................................................................

12,000

Temporary
Difference
Depreciation

1/1/12
12 JE
12/31/12

Future Taxable
(Deductible) Amounts
($40,000)

Deferred Tax Asset


0
0
0

Tax
Rate
30%

55,500

12,000
Deferred Tax
Asset
Liability
$12,000

Deferred Tax Liability


1/1/12
12 JE
12/31/12

0
12,000
12,000

Balance Sheet Reporting: The $12,000 deferred tax liability is classified as a long-term liability (since the related PP&E is classified as noncurrent).

Income Tax Optional HW, Page |1

BRIEF EXERCISE 19-12


Income Tax Refund Receivable [($325,000 x 30%) + ($155,000* X 30%)]
Current Income Tax Benefit .............................................................

144,000
144,000

* ($480,000 NOL $325,000 CB to 2011)

BRIEF EXERCISE 19-13


Income Tax Refund Receivable ($350,000 x 40%) ....................................
Current Income Tax Benefit .............................................................

140,000

Deferred Tax Asset ($150,000* X 40%) .....................................................


Deferred Income Tax Benefit ..........................................................

60,000

140,000

60,000

(* NOL carryforward = $500,000 $350,000 = $150,000)

EXERCISE 19-2

Year
2012
2013

Depreciation Expense
Tax
Accounting
?
?
?
?

Taxable (Deductible) Amount


Current Year
Future Years
$ (40,000)
$ 40,000
10,000
30,000

Year
2012
2013

Rent Revenue
Tax
Accounting
$ 25,000
$ 0
0
25,000

Taxable (Deductible) Amount


Current Year
Future Years
$ 25,000
$ (25,000)
(25,000)
0

(a)

Pretax financial income


Excess of tax depreciation over book depreciation
Rent received in advance
Taxable income

(b)

Current Income Tax Expense .....................................................................


Income Tax Payable ($335,000 X 40%)...........................................

134,000

Deferred Income Tax Expense ..................................................................


Deferred Tax Asset .....................................................................................
Deferred Tax Liability........................................................................

6,000
10,000

Temporary
Difference
Depreciation
Unearned rent

1/1/12
12 JE
12/31/12

Future Taxable
(Deductible) Amounts
($40,000)
((25,000)

Deferred Tax Asset


0
10,000
10,000

$ 350,000
(40,000 )
25,000
$ 335,000

Tax
Rate
40%
40%

134,000

16,000
Deferred Tax
Asset
Liability
$16,000
$10,000

Deferred Tax Liability


1/1/12
12 JE
12/31/12

0
16,000
16,000

Income Tax Optional HW, Page |2

EXERCISE 19-2 continued


(c)

Current Income Tax Expense......................................................................


Income Tax Payable ($325,000 X .40) .............................................

130,000

Deferred Income Tax Expense....................................................................


Deferred Tax Liability .................................................................................
Deferred Tax Asset...........................................................................

6,000
4,000

Temporary
Difference
Depreciation

12/31/12
12/31/13

Future Taxable
(Deductible) Amounts
($30,000)

Deferred Tax Asset


10,000
13 JE
0

10,000

Tax
Rate
40%

13 JE

130,000

10,000
Deferred Tax
Asset
Liability
$12,000

Deferred Tax Liability


12/31/12
4,000
12/31/13

16,000
12,000

EXERCISE 19-4
(a)

Pretax financial income


Excess depreciation per tax return
Excess rent collected over rent earned
Nondeductible pollution fines
Taxable income

(b)

Current Income Tax Expense........................................................................


Income Tax Payable ($102,000 x 30%) .............................................

30,600

Deferred Tax Asset .......................................................................................


Deferred Tax Liability..........................................................................
Deferred Income Tax Benefit .............................................................

8,100

Temporary Difference
Depreciation
Unearned rent revenue

1/1/12
12 JE
12/31/12
(c)

(d)

Future Taxable
(Deductible) Amounts
($16,000)
((27,000)

Deferred Tax Asset


0
8,100
8,100

Income before income taxes


Income tax expense (benefit):
Current
Deferred
Net income
$27,300 / $80,000 = 34.1% effective tax rate

$ 80,000
(16,000)
27,000
11,000
$ 102,000

Tax
Rate
30%
30%

30,600

4,800
3,300
Deferred Tax
Asset
Liability
$4,800
$8,100

Deferred Tax Liability


1/1/12
12 JE
12/31/12

0
4,800
4,800
$80,000

$30,600
(3,300 )

27,300
$52,700

Income Tax Optional HW, Page |3

EXERCISE 19-17

Year
2012
2013
2014

Installment Sales Gross Profit


Tax
Accounting
$ 8,000
$24,000
8,000
0
8,000
0

Taxable (Deductible) Amount


Current Year
Future Years
$ (16,000)
$ 16,000
8,000
8,000
8,000
0

Year
2012
2013
2014

Warranty Costs
Tax
Accounting
$ 5,000
$ 15,000
5,000
0
5,000
0

Taxable (Deductible) Amount


Current Year
Future Years
$ 10,000
$ (10,000)
(5,000)
(5,000)
(5,000)
0

2012: Current Income Tax Expense..........................................................................


Income Tax Payable ($163,000 x 45%) ...............................................

73,350

Deferred Income Tax Expense........................................................................


Deferred Tax Asset (see T-account) ...............................................................
Deferred Tax Liability (see T-account) .................................................

2,400
4,000

Temporary Difference
Installment sales GP
Warranty costs

Future Taxable
(Deductible) Amounts
($16,000)
( (10,000))

Tax
Rate*
40%
40%

73,350

6,400
Deferred Tax
Asset
Liability
$6,400
$4,000

* note that since the new 40% tax rate was enacted into law on Jan. 1, 2012, this future tax rate should be used
to compute deferred taxes at the end of 2012.
2013: Current Income Tax Expense.........................................................................
Income Tax Payable ($213,000 x 40%) ..............................................

85,200

Deferred Tax Liability (see T-account) ...........................................................


Deferred Tax Asset (see T-account) ...................................................
Deferred Income Tax Benefit ..............................................................

3,200

Temporary Difference
Installment sales GP
Warranty costs

Future Taxable
(Deductible) Amounts
($8,000)
( (5,000))

Tax
Rate
40%
40%

85,200

2,000
1,200
Deferred Tax
Asset
Liability
$3,200
$2,000

2014: Current Income Tax Expense.........................................................................


Income Tax Payable ($93,000 x 40%) ................................................

37,200

Deferred Tax Liability (see T-account) ...........................................................


Deferred Tax Asset (see T-account) ...................................................
Deferred Income Tax Benefit ..............................................................

3,200

Calculation of JE amounts:
Deferred Tax Asset
1/1/12
0
12 JE
4,000
12/31/12
4,000
13 JE
12/31/13
2,000
14 JE
12/31/14
0

2,000

13 JE

2,000

14 JE

37,200

Deferred Tax Liability


1/1/12
12 JE
12/31/12
3,200
12/31/13
3,200
12/31/14

2,000
1,200

0
6,400
6,400
3,200
0

Income Tax Optional HW, Page |4

EXERCISE 19-20

Year
2012
2013
2014
2015

Depreciation Expense
Tax
Accounting
$?
$?
?
?
?
?
?
?

Taxable (Deductible) Amount


Current Year
Future Years
$ (60,000)*
$ 60,000
20,000
40,000
30,000
10,000
10,000
0

* tax basis $340,000 vs book basis $400,000 (since tax basis is smaller than accounting basis, this means that
tax depreciation has been larger than accounting depreciation in the past)

Year
2012
2013
(a)

Warranty Costs
Tax
Accounting
$
0
$ 150,000
150,000
0

Current Income Tax Expense......................................................................


Income Tax Payable ($550,000 x 34%) ...........................................

187,000

Deferred Tax Asset .....................................................................................


Deferred Tax Liability........................................................................
Deferred Income Tax Benefit ...........................................................

51,000

Temporary Difference
Depreciation Expense (13-14)
Depreciation Expense (15)
Warranty Costs (13)
Total

1/1/12
12 JE
12/31/12
(b)

Taxable (Deductible) Amount


Current Year
Future Years
$ 150,000
$ (150,000)
(150,000)
0

Deferred Tax Asset


0
51,000
51,000

Future Taxable
(Deductible) Amounts
($50,000
10,000
(150,000)

Tax
Rate
34%
30%
34%

187,000

20,000
31,000
Deferred Tax
Asset
Liability
$17,000
3,000
$51,000
$51,000
$20,000

Deferred Tax Liability


1/1/12
12 JE
12/31/12

0
20,000
20,000

Current assets
Deferred tax asset

$51,000

Long-term liabilities
Deferred tax liability

$20,000

Note: The deferred tax asset is classified as current because the related warranty obligation is a current
liability. The deferred tax liability is classified as noncurrent because the related plant assets are longterm.

Income Tax Optional HW, Page |5

EXERCISE 19-22

Year
2012
2013
2014

Accounts Receivable
Tax
Accounting
$?
$?
?
?
?
?

Taxable (Deductible) Amount


Current Year
Future Years
$ (50,000) *
$ 50,000
30,000
20,000
20,000
0

* Note: past difference equals tax basis $0 vs. accounting basis $50,000 which would result when revenues
accrued for accounting purposes were greater than the revenues for tax purposes, resulting in taxable income
being less than accounting income

Year
2012
2013

Litigation Loss Liability


Tax
Accounting
$
0
$ 20,000
20,000
0

Taxable (Deductible) Amount


Current Year
Future Years
$ 20,000 **
$ (20,000)
(20,000)
0

** Note: past difference equals tax basis $0 vs. accounting basis $20,000 which would result when a loss has
been accrued for accounting purposes but not for tax purposes; therefore, the past taxable income would be
greater than accounting income
(a)

Current Income Tax Expense......................................................................


Income Tax Payable ($300,000 x 34%) ...........................................

102,000

Deferred Income Tax Expense....................................................................


Deferred Tax Asset .....................................................................................
Deferred Tax Liability........................................................................

10,200
6,800

Temporary Difference
Accounts receivable
Litigation liability

1/1/12
12 JE
12/31/12
(b)

Future Taxable
(Deductible) Amounts
($ 50,000)
( (20,000)

Deferred Tax Asset


0
6,800
6,800

17,000
Deferred Tax
Liability
*$17,000*
$6,800
Asset

Deferred Tax Liability


1/1/12
12 JE
12/31/12

0
17,000
17,000

A net deferred tax liability of $10,200 will be reported on the balance sheet in current liabilities.
Balance Sheet Account Related to
Related to Temporary Difference
Accounts receivable
Litigation loss liability
Net

Tax
Rate
34%
34%

102,000

Classification
Current*
Current

Resulting Deferred Tax Asset (Liability)


Current
Noncurrent
$ (17,000)
6,800
$ (10,200)

The deferred tax liability is current because the related accounts receivable is classified as a current asset since the operating cycle of the business is two years.

Income Tax Optional HW, Page |6

EXERCISE 19-24
(a)

2011
Current Income Tax Expense......................................................................
Income Tax Payable ($100,000 X 40%)...........................................

40,000

2012
Current Income Tax Expense......................................................................
Income Tax Payable ($90,000 X 40%) .............................................

36,000

2013
Income Tax Refund Receivable [($100,000 X 40%) + ($90,000 X 40%)] ...
Current Income Tax Benefit .............................................................

76,000

Deferred Tax Asset ($50,000 X 45%) ........................................................


Allowance to Reduce Deferred Tax Asset ($22,500 X ) ...............
Deferred Income Tax Benefit ..........................................................

40,000

36,000

76,000
22,500
11,250
11,250

(NOL carryforward = $240,000 $100,000 $90,000 = $50,000)


2014
Current Income Tax Expense......................................................................
Income Tax Payable [($120,000 $50,000) X 45%] .......................
Deferred Income Tax Expense....................................................................
Allowance to Reduce Deferred Tax Asset .................................................
Deferred Tax Asset...........................................................................
(b)

(c)

Operating loss before income taxes


Income tax benefit
Current benefit due to loss carryback
Deferred benefit due to loss carryforward
Net loss
Income before income taxes
Income tax expense
Current
Deferred*
Benefit due to loss carryforward*
Net income

31,500
31,500
11,250
11,250
22,500
$(240,000)

$76,000
11.250

( 87,250
$(152,750 )
$120,000

$31,500
22,500
(11,250 )

42,750
$ 77,250

* note that GAAP actually requires deferred income tax expense to be presented exclusive of the
amount attributed to operating loss carryforwards the sum of $22,500 and $(11,250) equals the debit
to Deferred Income Tax Expense of $11,250 in the journal entry.

Income Tax Optional HW, Page |7

PROBLEM 19-3

Year
2012
2013

Depreciation Expense
Tax
Accounting
$120,000
$150,000
240,000
150,000

Taxable (Deductible) Amount


Current Year
Future Years
$ 30,000
$ (30,000)
(90,000)
60,000

Note: This is an unusual situation where in the first year there is a future deductible amount, and in the second
and all remaining years, it switches to a future taxable amount.
(a)

Pretax financial income


Nontaxable interest
Depreciation expense
Taxable income

(b)

Current Income Tax Expense....................................................................


Income Tax Payable ($1,250,000 x 35%) ......................................

437,500

Deferred Income Tax Expense..................................................................


Deferred Tax Liability......................................................................
Deferred Tax Asset.........................................................................

31,500

Temporary Difference
Depreciation Expense

12/31/12*
12/31/13

$1,400,000
(60,000)
(90,000)
1,250,000

Future Taxable
(Deductible) Amounts
$60,000

Deferred Tax Asset


10,500
13 JE
0

10,500

Tax
Rate
35%

437,500

21,000
10,500

Asset

Deferred Tax
Liability
*$21,000*

Deferred Tax Liability


12/31/12
13 JE
12/31/13

0
21,000
21,000

* 12/31/12 balance = $30,000 X 35%


(c)

Income before income taxes and extraordinary item ($1,400,000 - $200,000)


Income tax expense
Current *
$367,500
Deferred
31,500
Income before extraordinary gain
Extraordinary gain (net of $70,000 taxes)
Net income

$1,200,000

399,000
801,000
130,000
$ 931,000

* equals $437,500 total current income tax expense less $70,000 ($200,000 x 35%) allocated to the
extraordinary gain (note: this type of tax allocation is intraperiod tax allocation)
(d)

Long-term liabilities
Deferred tax liability

$21,000

note: deferred tax liability is classified as noncurrent because the related balance sheet account resulting in the temporary difference (net equipment) is classified as long-term

Income Tax Optional HW, Page |8

PROBLEM 19-5
(a)

2012
Income Tax Refund Receivable [($50,000 X 30%) + ($80,000 X 40%)] .........
Current Income Tax Benefit ................................................................

47,000
47,000

remaining NOL to carryforward = $180,000 $50,000 $80,000 = $50,000


Deferred Tax Asset ($50,000 X 40%*) ............................................................
Deferred Income Tax Benefit ...............................................................

20,000
20,000

* use 40% rate from 2013 since problem says that loss carryforward is expected to be realized in
year immediately following the loss
2013
Current Income Tax Expense..........................................................................
Income Tax Payable [($70,000 $50,000) X 40%] ............................
Deferred Income Tax Expense........................................................................
Deferred Tax Asset ($0 balance needed in account) ...........................
2014
Current Income Tax Expense..........................................................................
Income Tax Payable ($100,000 X 35%)...............................................

8,000
8,000
20,000
20,000

35,000
35,000

(b)

On the December 31, 2012 balance sheet:


Income tax refund receivable for $47,000 will be reported under current assets
Deferred tax asset of $20,000 will also be classified as a current asset because the benefits of the loss
carryforward are expected to be realized in the year that immediately follows the loss year (i.e., 2013).
Retained earnings is increased by $67,000 ($47,000 + $20,000) as a result of the entries to record the
benefits of the loss carryback and the loss carryforward.

(c)

2012 Income Statement


Operating loss before income taxes
Income tax benefit
Current income tax benefit due to loss carryback
Deferred income tax benefit due to loss carryforward
Net loss

(d)

$(180,000)
$47,000
20,000

( 67,000
$(113,000 )

2013 Income Statement


Income before income taxes
Income tax expense
Current
Deferred
Net income

$70,000
$ 8,000
20,000

28,000
$42,000

Income Tax Optional HW, Page |9

PROBLEM 19-9
(a)

Pretax financial income


Permanent differences:
Fine for pollution
Tax-exempt interest
Originating temporary differences:
Excess warranty expense per books ($7,000 $2,000)
Excess construction profits per books ($92,000 $67,000)
Excess depreciation per tax ($80,000 $60,000)
Taxable income

(b)
Temporary Difference
Warranty costs
Construction profits
Depreciation
Totals
(c)

3,500
(1,500 )
5,000
(25,000 )
(20,000 )
$ 62,000

Tax
Rate
40%
40%
40%

Deferred Tax
Asset
Liability
$2,000
*$10,000
0(0,000)
* 8,000
$2,000
*$18,000

Current Income Tax Expense........................................................................


Income Tax Payable ($62,000 x 40%) ...............................................

24,800

Deferred Income Tax Expense......................................................................


Deferred Tax Asset .......................................................................................
Deferred Tax Liability..........................................................................

16,000
2,000

1/1/13
13 JE
12/31/13
(d)

Future Taxable
(Deductible) Amounts
($ (5,000)
( 25,000)
( 20,000

$100,000

Deferred Tax Asset


0
2,000
2,000

Income before income taxes


Income tax expense
Current
Deferred
Net income

24,800

Deferred Tax Liability


1/1/13
13 JE
12/31/13

18,000

0
18,000
18,000
$100,000

$24,800
16,000

40,800
$ 59,200