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Chapter 16

Accounting for Income Taxes

EXERCISE S
Exercise 16-1

Since taxable income is less than accounting income, a future taxable amount will occur when the temporary difference reverses. This means a deferred tax liability should be recorded to reflect the future tax consequences of the temporary difference.
($ in millions)

Income tax expense (to balance) Deferred tax liability ([$80 million 50 million] x 35%) Income tax payable ($50 million x 35%)

28.0 10.5 17.5

Exercise 16-2
Income tax payable (given)

Income tax expense (to balance)249,000 Deferred tax asset ($90,000 x 40%) 36,000 285,000

Alternate Exercise and Problem Solutions

The McGraw-Hill Companies, Inc., 2011 16-1

Requirement 1

Exercise 16-3

($ in millions) Current Future Year Deductible 2011 Amounts

Temporary difference: Taxable income Enacted tax rate Tax payable currently Deferred tax asset Deferred tax asset: Ending balance (balance currently needed) Less: beginning balance ($300 x 40%) Change needed to achieve desired balance Journal entries at the end of 2011 Income tax expense (to balance) Deferred tax asset (determined above) Income tax payable (determined above) Valuation allowance deferred tax asset Income tax expense
Of course, these two entries can be combined.

(280) 720 40% 288

40% (112) $ 112 (120) $( 8)

296 8 288 40 40

The McGraw-Hill Companies, Inc., 2011 16-2

Intermediate Accounting, 6e

Exercise 16-3 (concluded)


($ in millions)

Requirement 2

Income tax expense (to balance) Deferred tax asset (determined above) Income tax payable (determined above) Income tax expense

296 8 288 16 16

Valuation allowance deferred tax asset ([1/2 x $112] $40)


Of course, these two entries can be combined.

Exercise 16-4Requirement 1
Current Year 2011 ($ in thousands) Future Taxable Amounts 2012 2013 2014 Future Taxable Amounts

Accounting income Permanent difference: Municipal bond interest Temporary difference: Depreciation Taxable income Enacted tax rate Tax payable currently Deferred tax liability

900 (160) (40) 700 40% 280 40% 16 $16 0 $16


The McGraw-Hill Companies, Inc., 2011 16-3

(8)

8 40

40

Deferred tax liability: Ending balance (balance currently needed) Less: beginning balance Change needed to achieve desired balance

Alternate Exercise and Problem Solutions

Journal entry at the end of 2011 Income tax expense (to balance) Deferred tax liability (determined above) Income tax payable (determined above) 296 16 280

Requirement 2
($ in thousands)

Pretax accounting income Income tax expense Net income

$900 (296) $604

Exercise 16-5

Income Statement For the fiscal year ended June 30, 2011
($ in millions)

Revenues Cost of goods sold Gross profit Operating expenses Income from continuing operations before income taxes Income tax expense Income before extraordinary item and discontinued operations Loss on discontinued operations, less applicable income taxes of $16 Extraordinary casualty loss, less applicable income taxes of $2 Net income

$415 (175) $240 (90) $150 (60) $90 (24) (3) $63

PROBLEM S
The McGraw-Hill Companies, Inc., 2011 16-4 Intermediate Accounting, 6e

Requirement 1

Problem 16-1
($ in millions) Current Year 2011 Future Taxable Amounts 2012 2013 2014 Future Taxable Amounts [total]

Accounting income Temporary difference: Lot sales Taxable income Enacted tax rate Tax payable currently Deferred tax liability

68 (48) 20 40% 8 16 20 12 48

40% 19.2 $19.2 (0.0) $19.2

Deferred tax liability: Ending balance (balance currently needed) Less: beginning balance Change needed to achieve desired balance Journal entry at the end of 2011 Income tax expense (to balance) Deferred tax liability (determined above) Income tax payable (determined above) Problem 16-1 (concluded) Requirement 2
($ in millions) Current Year 2012 Future Taxable Amounts 2013 2014

27.2 19.2 8.0

Future Taxable Amounts [total]

Alternate Exercise and Problem Solutions

The McGraw-Hill Companies, Inc., 2011 16-5

Accounting income Temporary difference: Lot sales Taxable income Enacted tax rate Tax payable currently Deferred tax liability

60 16 76 40% 30.4 20 12 32

35% 11.2 $11.2 (19.2) $(8.0)

Deferred tax liability: Ending balance Less: beginning balance Change needed to achieve desired balance Journal entry at the end of 2012 Income tax expense (to balance) Deferred tax liability (determined above) Income tax payable (determined above) 22.4 8.0 30.4

Requirement 3 The balance in the deferred tax liability account at the end of 2012 would have been $12.8 million if the new tax rate had not been enacted: Future taxable amounts Previous tax rate Deferred tax liability $32 million 40% $12.8 million

The effect of the change is included in income tax expense, because income tax expense is less than it would have been if the rate had not changed.

The McGraw-Hill Companies, Inc., 2011 16-6

Intermediate Accounting, 6e

Problem 16-2Requirement 1
($ in 000s) Prior Years 2009 2010 Current Year 2011 Future Deductible Amounts [total]

Accounting loss Permanent difference: Fine paid Temporary differences: Loss contingency Taxable loss Loss carryback Loss carryforward Enacted tax rate Tax payable (refundable) Deferred tax asset

(540) 20 40 (480) 420 60 0 40% 0 (40)

(300) (120)

40% 40% (120) (48)

(60) (100) 40% (40)

Deferred tax asset: Ending balance (balance currently needed) Less: beginning balance Change needed to achieve desired balance Journal entry at the end of 2011 Receivable income tax refund ($120 + 48) Deferred tax asset (determined above) Income tax benefit (to balance) 168 40

$ 40 (0) $40

208

Alternate Exercise and Problem Solutions

The McGraw-Hill Companies, Inc., 2011 16-7

Requirement 2

($ in 000s)

Operating loss before income taxes Less: Income tax benefit: Tax refund from loss carryback Future tax benefits Net operating loss

$540 $168 40

208 $ 332

The McGraw-Hill Companies, Inc., 2011 16-8

Intermediate Accounting, 6e

Problem 16-2 (concluded) Requirement 3


($ in 000s) Current Year 2012 Future Deductible Amounts

Accounting income Temporary differences: Loss contingency Operating loss carryforward Taxable income Enacted tax rate Tax payable Deferred tax asset Deferred tax asset: Ending balance (balance currently needed) Less: beginning balance Change needed to achieve desired balance Journal entry at the end of 2012 Income tax expense (to balance) Deferred tax asset (determined above) Income tax payable (determined above)

240 (40) (60) 140 40% 56

0 40% 0

$ 0 (40) $(40)

96 40 56

Alternate Exercise and Problem Solutions

The McGraw-Hill Companies, Inc., 2011 16-9