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CHAPTER 19

All of the following are taken from Wiley’s Intermediate Accounting 16th edition, Chapter 19.

E19-2.
(Two Differences, No Beginning Deferred Taxes, Tracked through 2 Years)
(LO 1, 2) The following information is available for Wenger Corporation for 2016 (its first year
of operations).
 Excess of tax depreciation over book depreciation, $40,000. This $40,000 difference will
reverse equally over the years 2017-2020.
 Deferral, for book purposes, of $20,000 of rent received in advance. The rent will be
recognized in 2017.
 Pretax financial income, $300,000.
 Tax rate for all years, 40%.
Instructions
(a) Compute taxable income for 2016.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income
taxes payable for 2016.
(c) Prepare the journal entry to record income tax expense, deferred income taxes, and income
taxes payable for 2017, assuming taxable income of $325,000.

(a)

Item Book Tax Book --> Tax

Book Income 300000
Depreciation 0 -40000 -40000
Rent 0 +20000 +20000
Tax Income 280000

(b)

Same tax rates, no permanent differences. Can default for income tax expense.

Inc Tax Expense = 300000 x 40% = 120,000.

Income tax payable = 280000 x 40% = 112,000.

Depreciation: Right now, tax depreciation is higher than book. That means tax income is lower
than book. So in the future, book income will be lower than tax, which means a DTL.

DTL = 40,000 x 40% = 16,000.

Rent: Right now, tax income is higher than book. In the future, book income is higher than tax,
which means a DTA.

DTA = 20,000 x 40% = 8,000.

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Entry:

Income Tax Expense.......................................................................... 120,000

Deferred Tax Asset............................................................................. 8,000
Deferred tax liability................................................................ 16,000
Income Taxes Payable.............................................................. 112,000

Income statement:

Income before income tax.................................................................. 300,000

Income tax expense
Current......................................................................(112,000)
Deferred........................................................................(8,000)
.................................................................................................. (120,000)
Net income......................................................................................... 180,000

(c) 2nd year. Given taxable income this time, so need to work backwards.

Item Book Tax Book --> Tax

Book Income ?
Depreciation -10000 0 +10000
Rent +20000 0 -20000
Tax Income 325000

Book income = 335,000.

Same tax rates, no permanent differences, can default for tax expense.

Income tax expense = 335,000 x 40% = 134,000.

Income tax payable = 325,000 x 40% = 130,000.

Required DTA balance = 0. Need to reduce DTA by 8,000.

Required DTL balance = 30,000 x 40% = 12,000. Need to reduce DTL by 4,000.

Income Tax Expense.......................................................................... 134,000

Deferred Tax Liability........................................................................ 4,000
Deferred tax asset.....................................................................
Income tax payable.................................................................. 130,000
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Income statement:

Income before income tax.................................................................. 335,000

Income tax expense
Current......................................................................(130,000)
Deferred........................................................................(4,000)
.................................................................................................. (134,000)
Net income......................................................................................... 201,000
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E19-4. Zurich Company reports pretax financial income of $70,000 for 2017. The following
items cause taxable income to be different than pretax financial income.
 Depreciation on the tax return is greater than depreciation on the income statement by
$16,000.
 Rent collected on the tax return is greater than rent recognized on the income statement
by $22,000.
 Fines for pollution appear as an expense of $11,000 on the income statement.
Zurich's tax rate is 30% for all years, and the company expects to report taxable income in all
future years. There are no deferred taxes at the beginning of 2017.

Instructions
(a) Compute taxable income and income taxes payable for 2017.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income
taxes payable for 2017.
(c) Prepare the income tax expense section of the income statement for 2017, beginning with the
line “Income before income taxes.”
(d) Compute the effective income tax rate for 2017.

(a)

Item Book Tax Book --> Tax

Book Income 70000
Depreciation 0 -16000 -16000
Rent 0 +22000 22000
Nondeductible fines -11000 0 11000
Tax Income 87000

Income tax payable = 87,000 x 30% = 26,100.

Income tax expense: can’t do 70,000 x 30% because of the permanent difference. Need to find
what book income would be if there was no permanent difference, and use that.
 Book income = 70,000, which includes an 11,000 expense for fines.
 If this expense did not exist, book income would be 81,000.
 81,000 x 30% = 24,300 income tax expense.
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(b)

Depreciation: Right now, tax depreciation is higher than book. That means tax income is lower
than book. So in the future, book income will be lower than tax, which means a DTL.

DTL = 16,000 x 30% = 4,800.

Rent: Right now, tax income is higher than book. In the future, book income is higher than tax,
which means a DTA.

DTA = 22,000 x 30% = 6,600.

Income Tax Expense............................................................................ 24,300

Deferred Tax Asset............................................................................... 6,600
Deferred tax liability..................................................................
Income Taxes Payable................................................................

(c)

Income statement:

Income before income tax.................................................................. 70,000

Income tax expense
Current........................................................................(26,100)
Deferred..........................................................................1,800
.................................................................................................. (24,300)
Net income......................................................................................... 45,700

(d) effective tax rate = income tax expense / book income = 24,300 / 70,000 = 34.7%.
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E19-5. The following facts relate to Krung Thep Corporation.

 Deferred tax liability, January 1, 2017, $40,000.
 Deferred tax asset, January 1, 2017, $0.
 Taxable income for 2017, $95,000.
 Pretax financial income for 2017, $200,000.
 Cumulative temporary difference at December 31, 2017, giving rise to future taxable
amounts, $240,000.
 Cumulative temporary difference at December 31, 2017, giving rise to future deductible
amounts, $35,000.
 Tax rate for all years, 40%.
 The company is expected to operate profitably in the future.
Instructions
(a) Compute income taxes payable for 2017.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income
taxes payable for 2017.
(c) Prepare the income tax expense section of the income statement for 2017, beginning with the
line “Income before income taxes.”

(a)

Income tax payable = 95,000 x 40% = 38,000.

Because tax rate doesn’t change and no permanent differences, can use default for income tax
expense: 200,000 x 40% = 80,000.

(b)

DTA:
 cumulative difference giving rise to future deductible amounts = 35,000.
 Required DTA balance = 35,000 x 40% = 14,000.
 Existing DTA balance = 0.
 Need a 14,000 increase to DTA.

DTL
 Cumulative difference giving rise to future taxable amounts = 240,000.
 Required DTL balance = 240,000 x 40% = 96,000.
 Current DTL balance = 40,000.
 Need a 56,000 increase to DTL.

Income Tax Expense............................................................................ 80,000

Deferred Tax Asset............................................................................... 14,000
Deferred tax liability..................................................................
Income Taxes Payable................................................................
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(c)

Income statement:

Income before income tax.................................................................. 200,000

Income tax expense
Current........................................................................(38,000)
Deferred......................................................................(42,000)
.................................................................................................. (80,000)
Net income......................................................................................... 120,000
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E19-6. Listed below are items that are commonly accounted for differently for financial
reporting purposes than they are for tax purposes.

Instructions: For each item below, indicate whether it involves:

 (1) A temporary difference that will result in future deductible amounts and, therefore,
will usually give rise to a deferred income tax asset.
 (2) A temporary difference that will result in future taxable amounts and, therefore, will
usually give rise to a deferred income tax liability.
 (3) A permanent difference.

Use the appropriate number to indicate your answer for each.

(a)
________ The MACRS depreciation system is used for tax purposes, and the straight-line
depreciation method is used for financial reporting purposes for some plant assets.

(b)
________ A landlord collects some rents in advance. Rents received are taxable in the period
when they are received.

(c)
________ Expenses are incurred in obtaining tax-exempt income.

(d)
________ Costs of guarantees and warranties are estimated and accrued for financial reporting
purposes.

(e)
________ Installment sales of investments are accounted for by the accrual method for financial
reporting purposes and the installment method for tax purposes.

(f)
________ For some assets, straight-line depreciation is used for both financial reporting
purposes and tax purposes, but the assets' lives are shorter for tax purposes.

(g)
________ Interest is received on an investment in tax-exempt municipal obligations.

(h)
________ Proceeds are received from a life insurance company because of the death of a key
officer. (The company carries a policy on key officers.)

(i)
________ The tax return reports a deduction for 80% of the dividends received from U.S.
corporations. The cost method is used in accounting for the related investments for financial
reporting purposes.
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(j)
________ Estimated losses on pending lawsuits and claims are accrued for books. These losses
are tax deductible in the period(s) when the related liabilities are settled.

(k)
________ Expenses on stock options are accrued for financial reporting purposes.

a) Now: tax expense is larger so tax income is lower; later, B < T so DTL.
b) Now: book income is lower than tax; later, B > T so DTA.
c) Permanent: these expenses are only in book income.
d) Now: book expense is larger so book income is lower; later, B > T so DTA.
e) Now: book income is higher than tax; later, B < T so DTL.
f) Now: tax expense is larger so tax income is lower; later, B < T so DTL.
g) Permanent: this income is only in book income.
h) Permanent: this income is only in book income.
i) Permanent: this expense is only in taxable income.
j) Now: book expense is larger so book income is lower; later, B > T so DTA.
k) Now: book expense is larger so book income is lower; later, B > T so DTA.
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BE19-10. Clydesdale Corporation has a cumulative temporary difference related to depreciation

of $580,000 at December 31, 2017. This difference will reverse as follows: 2018, $42,000; 2019,
$244,000; and 2020, $294,000. Enacted tax rates are 34% for 2018 and 2019, and 40% for 2020.
Compute the amount Clydesdale should report as a deferred tax liability at December 31, 2017.

Year Future taxable amount X Tax Rate = Deferred tax liability

2018 $ 42,000 34% $ 14,280
2019 244,000 34% 82,960
2020 294,000 40% 117,600
$214,840
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E19-22. Felicia Rashad Corporation has pretax financial income (or loss) equal to taxable
income (or loss) from 2009 through 2017 as follows.
Income (Loss) Tax Rate
2009 $ 29,000  30%
2010   40,000  30  
2011   17,000  35  
2012   48,000  50  
2013 (150,000) 40  
2014   90,000  40  
2015   30,000  40  
2016   105,000  40  
2017   (60,000) 45  

Pretax financial income (loss) and taxable income (loss) were the same for all years since Rashad
has been in business. Assume the carryback provision is employed for net operating losses. In
recording the benefits of a loss carryforward, assume that it is more likely than not that the
related benefits will be realized.

Instructions
(a) What entry(ies) for income taxes should be recorded for 2013?

2013 NOL (150,000)

2011 TI 17,000 x 35% = 5,950 taxes paid.
2012 TI 48,000 x 50% = 24,000 taxes paid.

Remaining NOL (85,000) x 40% = 34,000 DTA.

To summarize:
 Will receive as a refund: 5,950 + 24,000 = 29,950.
 Remaining 85,000 NOL will carryforward at expected 40% rate; need to create a 34,000
DTA.
 There will be no taxable income (income tax payable) or book income (income tax
expense) in 2013.

Entries:

Income tax refund receivable 29,950

Benefit – Loss CB 29,950

DTA 34,000
Benefit – Loss CF 34,000
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(b) Indicate what the income tax expense portion of the income statement for 2013 should look
like. Assume all income (loss) relates to continuing operations.

Income statement:

Loss before income tax...................................................................... (150,000)

Income tax benefit
Loss Carryback.............................................................29,950
Loss Carryforward........................................................34,000
.................................................................................................. 63,950
Net loss............................................................................................... (86,050)

(c) What entry for income taxes should be recorded in 2014?

NOL to go (85,000)
TI in 2014 90,000
New TI 5,000

Summary:
 DTA of 34,000 is used up, need to reduce to zero.
 New TI is 5,000; income tax payable = 5,000 x 40% = 2,000.
 Income tax expense = 90,000 book income x 40% = 36,000.

Entry:

Income tax expense 36,000

DTA 34,000
Income tax payable 2,000

(d) How should the income tax expense section of the income statement for 2014 appear?

Income statement:

Income before income tax.................................................................. 90,000

Income tax expense
Current..........................................................................(2,000)
Deferred......................................................................(34,000)
.................................................................................................. (36,000)
Net income......................................................................................... 54,000
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(e) What entry for income taxes should be recorded in 2017?

2017 NOL (60,000)

2015 TI 30,000 x 40% = 12,000 taxes paid.
2017 NOL to go (30,000)
2016 TI is 105, use what can: 30,000 x 40% = 12,000 taxes paid.

No remaining NOL.

To summarize: Will receive as a refund: 24,000. No NOL to carryforward so no DTA.

Entry:

Income tax refund receivable 24,000

Benefit – loss CB 24,000

(f) How should the income tax expense section of the income statement for 2017 appear?

Income statement:

Loss before income tax...................................................................... (60,000)

Income tax benefit
Loss Carryback.............................................................24,000
.................................................................................................. 24,000
Net loss............................................................................................... (36,000)
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E19-9. At December 31, 2016, Belmont Company had a net deferred tax liability of $375,000.
An explanation of the items that compose this balance is as follows.
Resulting Balances
Temporary Differences
in Deferred Taxes
1. Excess of tax depreciation over book depreciation $200,000 
2. Accrual, for book purposes, of estimated loss contingency from pending
lawsuit that is expected to be settled in 2017. The loss will be deducted on (50,000)
the tax return when paid.
3. Accrual method used for book purposes and installment method used for
 225,000 
tax purposes for an isolated installment sale of an investment.
$375,000 

In analyzing the temporary differences, you find that $30,000 of the depreciation temporary
difference will reverse in 2017, and $120,000 of the temporary difference due to the installment
sale will reverse in 2017. The tax rate for all years is 40%.

Instructions: Indicate the manner in which deferred taxes should be presented on Belmont
Company's December 31, 2016, balance sheet.

Items:
 Now, depreciation expense for tax is greater than book, so tax income is lower than book.
Later, B < T, so DTL of 200.
 Now, lawsuit expense for book is greater than tax, so book income is lower than tax.
Later, B > T, so DTA of 50.
 Now, installment sale revenue for book is greater than tax, so book income is greater than
tax. Later, B < T, so DTL of 225.

Altogether:
 DTA = 50.
 DTL = 200 + 225 = 425.

For balance sheet, net together and get a 375 credit, reported as 1 line item, a noncurrent net
DTL.
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E19-12. Jennifer Capriati 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.

Instructions
(a) Record income tax expense, deferred income taxes, and income taxes payable 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.

Income tax payable = 820,000 x 40% = 328,000.

Income tax expense: because same tax rates and no permanent differences, can use book income
x tax rate.
 In 2016, there was a cumulative temporary difference (i.e., difference between book and
tax income) of $375,000. This difference created a deferred tax asset. A DTA means that
in the future, B > T, but in 2016, B < T. Therefore, in 2016, taxable income was greater
than book income by $375,000.
 Now in 2017, this cumulative difference has increased to $450,000. That means a
$75,000 increase occurred in 2017.
 Therefore in 2017, taxable income was greater than book income by $75,000.
 So, book income must be 820,000 – 75,000 = 745,000.
 Income tax expense = 745,000 x 40% = 298,000.

DTA:
 Balance needs to be total difference x tax rate = 450,000 x 40% = 180,000.
 Current balance = 150,000.
 DTA needs a 30,000 increase.

Entry:

Income tax expense 298,000

DTA 30,000
Income tax payable 328,000

(b) The entry above would still be done, but the following would also be necessary:

Income Tax Expense........................................................................... 30,000

Allowance to Reduce Deferred Tax Asset
to Expected Realizable Value............................................... 30,000
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E19-13. Assume the same information as E19-12, except that at the end of 2016, Jennifer
Capriati Corp. had a valuation account related to its deferred tax asset of $45,000.

Instructions
(a) Record income tax expense, deferred income taxes, and income taxes payable for 2017,
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 2017,
assuming that it is more likely than not that none of the deferred tax asset will be realized.

(a)

The first journal entry from E19-12 would still need to be done. Income tax expense and income
tax payable are still calculated the same way. The deferred tax asset needs the 30,000 increase so
that the balance in the DTA equals the total cumulative difference multiplied by the tax rate.

Income Tax Expense.......................................................................... 298,000

Deferred Tax Asset............................................................................. 30,000
Income Taxes Payable.............................................................. 328,000

If it is more likely than not that the DTA will be realized in full, then any Allowance for DTA
should be removed. It has a credit balance of 45, so that needs to be zeroed out:

Allowance to Reduce Deferred Tax Asset

to Expected Realizable Value......................................................... 45,000
Income Tax Expense................................................................ 45,000

(b)

Again, like part (a), the first journal entry needs to be done:

Income Tax Expense.................................................................................... 298,000

Deferred Tax Asset............................................................................. 30,000
Income Taxes Payable.............................................................. 328,000

Now, if it’s more likely than not that none of the DTA will be realized, then the allowance and
the DTA balances should match. After the entry above, the DTA balance is 180,000, but the
allowance balance is still only 45,000. Needs to be increased by 135,000:

Income Tax Expense.......................................................................... 135,000

Allowance to Reduce Deferred Tax Asset
to Expected Realizable Value............................................... 135,000
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E19-23. Spamela Hamderson Inc. reports the following pretax income (loss) for both financial
reporting purposes and tax purposes. (Assume the carryback provision is used for a net operating
loss.)

Year Pretax Income (Loss) Tax Rate

2015 $120,000  34%
2016   90,000  34  
2017  (280,000) 38  
2018   220,000  38  
The tax rates listed were all enacted by the beginning of 2015.

Instructions
(a) Prepare the journal entries for the years 2015-2018 to record income tax expense (benefit)
and income taxes payable (refundable) and the tax effects of the loss carryback and carryforward,
assuming that at the end of 2017 the benefits of the loss carryforward are judged more likely than
not to be realized in the future.
(b) Using the assumption in (a), prepare the income tax section of the 2017 income statement
beginning with the line “Operating loss before income taxes.”
(c) Prepare the journal entries for 2017 and 2018, assuming that based on the weight of available
evidence, it is more likely than not that one-fourth of the benefits of the loss carryforward will
not be realized.
(d) Using the assumption in (c), prepare the income tax section of the 2017 income statement
beginning with the line “Operating loss before income taxes.”

(a) 2015

Income Tax Expense.............................................................................. 40,800

Income Taxes Payable ($120,000 X 34%)...................................

2016

Income Tax Expense........................................................................... 30,600

Income Taxes Payable ($90,000 X 34%).................................

2017

2017 NOL (280,000)

2015 TI 120,000 x 34% = 40,800 taxes paid.
2016 TI 90,000 x 34% = 30,600 taxes paid.

Remaining NOL (70,000) x 38% = 26,600 DTA.

To summarize:
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 Will receive as a refund: 40,800 + 30,600 = 71,400.

 Remaining 70,000 NOL will carryforward at expected 38% rate; need to create a 26,600
DTA.
 There will be no taxable income (income tax payable) or book income (income tax
expense).

Entries:

Income tax refund receivable 71,400

Benefit – Loss CB 71.400

DTA 26,600
Benefit – Loss CF 26,600

2018

Remaining NOL (70,000)

2018 TI 220,000
New 2018 TI 150,000

To summarize:
 Used up the DTA of 26,600, needs to be zeroed out.
 Income tax expense = 220,000 x 38% = 83,600.
 Income tax payable = 150,000 x 38% = 57,000.

Income Tax Expense.......................................................................... 83,600

DTA.......................................................................................... 26,600
Income tax payable.................................................................. 57,000

(b) Operating loss before income taxes $(280,000)

Income tax benefit
Benefit due to loss carryback $71,400
Benefit due to loss carryforward 26,600 98,000
Net loss $(182,000
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(c) Prepare the journal entries for 2017 and 2018, assuming that based on the weight of available
evidence, it is more likely than not that one-fourth of the benefits of the loss carryforward
will not be realized.

The entries we did for 2017 still needs to happen:

Income tax refund receivable 71,400

Benefit – Loss CB 71.400

DTA 26,600
Benefit – Loss CF 26,600

But now an allowance equal to ¼ of the DTA also needs to be created = 6,650.

Benefit Due to Loss Carryforward..................................................... 6,650

Allowance to Reduce Deferred Tax Asset
to Expected Realizable Value............................................... 6,650
(25% X $26,600)

Income statement:

Operating loss before income taxes $(280,000)

Income tax benefit
Benefit due to loss carryback $71,400
Benefit due to loss carryforward 19,950
91,350
Net loss $(188,650

For 2018, the first entry is still the same (recognize income tax expense, DTA, and income tax
payable):

Income Tax Expense.......................................................................... 83,600

DTA.......................................................................................... 26,600
Income tax payable.................................................................. 57,000

In addition, the allowance we created needs to be zeroed out, because the DTA it was attached to
no longer exists:

Allowance to Reduce Deferred Tax Asset

to Expected Realizable Value............................................................. 6,650
Benefit Due to Loss Carryforward............................................... 6,650
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Income statement:

Income before income taxes $220,000

Income tax expense
Current $(57,000)
Deferred (26,600)
Benefit due to loss carryforward 6,650
(76,950)
Net income $143,050