c19BExercises.qxd 3/14/13 12:01 PM Page B EXERCISES E19-1B (One Temporary Difference, Future Deductible Amounts, One Rate, No Beginning Deferred Taxes) Allied Corporation has one temporary difference at the end of 2014 that will reverse and cause deductible amounts of $40,000 in 2015, and $70,000 in 2016 Allied’s pretax financial income for 2014 is $125,000, and the tax rate is 40% for all years There are no deferred taxes at the beginning of 2014 Instructions (a) Compute taxable income and income taxes payable for 2014 (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014 (c) Prepare the income tax expense section of the income statement for 2014, beginning with the line “Income before income taxes.” E19-2B (Two Differences, No Beginning Deferred Taxes, Tracked through Years) The following information is available for DirectMedia Inc for 2014 Excess of tax depreciation over book depreciation, $80,000 This $80,000 difference will reverse equally over the next years Deferral, for book purposes, of $25,000 of subscription income received in advance The subscription income will be earned in 2015 Pretax financial income, $160,000 Tax rate for all years, 35% Instructions (a) Compute taxable income for 2014 (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014 (c) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2015, assuming taxable income of $255,000 E19-3B (One Temporary Difference, Future Taxable Amounts, One Rate, Beginning Deferred Taxes) At the beginning of 2014, Krypton Inc reporting a deferred tax liability of $80,000 At the end of 2014, the related cumulative temporary difference amounts to $300,000, and it will reverse evenly over the next years Pretax accounting income for 2014 is $380,000, the tax rate for all years is 40%, and taxable income for 2014 is $280,000 Instructions (a) Compute income taxes payable for 2014 (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014 (c) Prepare the income tax expense section of the income statement for 2014 beginning with the line “Income before income taxes.” E19-4B (Three Differences, Compute Taxable Income, Entry for Taxes) Metals Corporation reports pretax financial income of $260,000 for 2014 The following items cause taxable income to be different than pretax financial income Rental income on the income statement is less than rent collected on the tax return by $65,000 Depreciation on the tax return is greater than depreciation on the income statement by $40,000 Interest on an investment in a municipal bond of $6,500 on the income statement Metal’s tax rate is 40% for all years, and the company expects to report taxable income in all future years There are no deferred taxes at the beginning of 2014 Instructions (a) Compute taxable income and income taxes payable for 2014 (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014 (c) Prepare the income tax expense section of the income statement for 2014, beginning with the line “Income before income taxes.” (d) Compute the effective income tax rate for 2014 E19-5B (Two Temporary Differences, One Rate, Beginning Deferred Taxes) The following facts relate to Xylo Corporation c19BExercises.qxd • 3/14/13 12:01 PM Page Chapter 19 Accounting for Income Taxes Deferred tax liability, January 1, 2012, $0 Deferred tax asset, January 1, 2012, $24,000 Taxable income for 2014, $265,000 Pretax financial income for 2014, $345,000 Cumulative temporary difference at December 31, 2014, giving rise to future taxable amounts, $140,000 Cumulative temporary difference at December 31, 2014, giving rise to future deductible amounts, $120,000 Tax rate for all years, 40% The company is expected to operate profitably in the future Instructions (a) Compute income taxes payable for 2014 (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014 (c) Prepare the income tax expense section of the income statement for 2014, beginning with the line “Income before income taxes.” E19-6B (Identify Temporary or Permanent Differences) 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) For some assets, straight-line depreciation is used for tax purposes while double-declining balance method is used for financial reporting purposes (b) Warranty expenses are accrued when the sale is made, but cannot be deducted until the work is actually performed (c) The company uses the percentage of complete method to record revenue on long-term contracts for financial reporting purposes, but the completed contract method is used for tax purposes (d) Accelerated depreciation for tax purposes, and the straight-line depreciation method is used for financial reporting purposes for some equipment (e) A landlord collects some rents in advance Rents received are taxable in the period when they are received (f) Tax-exempt income (g) An SEC fine related to financial reporting irregularities (h) For financial reporting purposes, an estimated loss from a lawsuit is accrued The tax return will not report a deduction until an amount is paid (i) A liability for a guarantee is accrued for financial reporting purposes (j) Installment sales are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes E19-7B (Terminology, Relationships, Computations, Entries) Instructions Complete the following statements by filling in the blanks (a) If a $150,000 balance in Deferred Tax Liability was computed by use of a 30% rate, the underlying cumulative temporary difference amounts to $ _ (b) An income statement that reports current tax benefit of $63,000 and deferred tax expense of $19,000 will report total income tax of $ (c) If a taxable permanent difference originates in 2012, it will cause taxable income for 2012 to be (less than, greater than) pretax financial income for 2012 (d) If the income statement shows total income tax expense of $186,000 and deferred tax expenses of $45,000, the total taxes due on the tax return for the period are _ (e) If total tax expense is $225,000 and the current expense is $155,000, then the deferred tax _ (expense, benefit) is $ _ (f) In a period in which a deductible temporary difference reverses, the reversal will cause taxable income to be _ (less than, greater than) pretax financial income (g) An decrease in the Deferred Tax Assets account on the balance sheet is recorded by a _ (debit, credit) to the Income Tax Expense account c19BExercises.qxd 3/14/13 12:01 PM Page B Exercises (h) If a corporation’s “Income tax payable” on the balance sheet totals $100,000, the company made estimated payments during the year totaling $40,000, and the tax rate is 40%, taxable income equals $ (i) A valuation account _ the balance reported in the balance sheet for a deferred tax asset to the amount expected to be realized (j) Deferred taxes (are, are not) recorded to account for temporary differences E19-8B (Two Temporary Differences, One Rate, Years) Tipper Company has two temporary differences between its income tax expense and income taxes payable The following information is available 2014 2015 2016 Pretax financial income Excess of depreciation expense on tax return Excess of warranty expense on financial income $225,000 (20,000) 10,000 $268,000 (15,000) 15,000 $365,000 (20,000) 16,000 Taxable income $215,000 $268,000 $361,000 The income tax rate for all years is 30% Instructions (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2014, 2015, and 2016 (b) Assuming there were no temporary differences prior to 2014, indicate how deferred taxes will be reported on the 2015 balance sheet Tipper’s product warranty is for 12 months (c) Prepare the income tax expense section of the income statement for 2015, beginning with the line “Pretax financial income.” E19-9B (Carryback and Carryforward of NOL, No Valuation Account, No Temporary Differences) The pretax financial income (or loss) figures for Metals, Inc are as follows 2011 2012 2013 2014 2015 2016 2017 $ 90,000 65,000 40,000 (230,000) 70,000 (50,000) 80,000 Pretax financial income (or loss) and taxable income (loss) were the same for all years involved Assume a 40% tax rate for 2011 and 2012 and a 35% tax rate for the remaining years Instructions Prepare the journal entries for the years 2014 to 2017 to record income tax expense and the effects of the net operating loss carrybacks and carryforwards assuming Metals, Inc uses the carryback provision All income and losses relate to normal operations (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.) E19-10B (Two NOLs, No Temporary Differences, No Valuation Account, Entries and Income Statement) Vintage Car Corporation has pretax financial income (or loss) equal to taxable income (or loss) from 2008 through 2017 as follows 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Income (Loss) Tax Rate $ 40,000 63,000 36,000 (86,000) (93,000) 76,000 59,000 (135,000) 96,000 168,000 40% 40% 30% 30% 40% 40% 50% 50% 40% 40% Pretax financial income (loss) and taxable income (loss) were the same for all years since Vintage Car 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 • c19BExercises.qxd • 3/14/13 12:01 PM Page Chapter 19 Accounting for Income Taxes Instructions (a) What entry(ies) for income taxes should be recorded for 2011? (b) Indicate what the income tax expense portion of the income statement for 2011 should look like Assume all income (loss) relates to continuing operations (c) What entry for income taxes should be recorded in 2012? (d) How should the income tax expense section of the income statement for 2012 appear? (e) What entry for income taxes should be recorded in 2015? (f) How should the income tax expense section of the income statement for 2015 appear? E19-11B (Three Differences, Classify Deferred Taxes) At December 31, 2014, Rockfellow Corp had a net deferred tax asset of $50,000 An explanation of the items that compose this balance is as follows Resulting Balances in Deferred Taxes Temporary Differences Accrual, for book purposes, of estimated warranty costs Warranty costs will be deducted on the tax return when paid Excess of tax depreciation over book depreciation Accrual, for book purposes, of an estimated litigation settlement expected to be paid in 2016 The loss will be deducted for tax purposes when paid $ 125,000 (110,000) 35,000 $ 50,000 In analyzing the temporary differences, you find that $30,000 of the depreciation temporary difference will reverse in 2015, and $100,000 of the temporary difference due to the warranty costs will reverse in 2015 The tax rate for all years is 40% Instructions Indicate the manner in which deferred taxes should be presented on Rockfellow’s December 31, 2014, balance sheet E19-12B (Two Temporary Differences, One Rate, Beginning Deferred Taxes, Compute Pretax Financial Income) The following facts relate to Integrated Products Corporation Deferred tax liability, January 1, 2014, $225,000 Deferred tax asset, January 1, 2014, $162,000 Taxable income for 2014, $386,000 Cumulative temporary difference at December 31, 2014, giving rise to future taxable amounts, $838,000 Cumulative temporary difference at December 31, 2014, giving rise to future deductible amounts, $965,000 Tax rate for all years, 30% No permanent differences exist The company is expected to operate profitably in the future Instructions (a) Compute the amount of pretax financial income for 2014 (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014 (c) Prepare the income tax expense section of the income statement for 2014, beginning with the line “Income before income taxes.” (d) Compute the effective tax rate for 2014 E19-13B (One Difference, Multiple Rates, Effect of Beginning Balance versus No Beginning Deferred Taxes) At the end of 2014, Frontier Corporation has $360,000 of cumulative temporary differences that will result in reporting future taxable amounts as follows 2015 2016 2017 2018 $105,000 90,000 75,000 90,000 $360,000 Tax rates enacted as of the beginning of 2013 are: 2013 and 2014 2015 2016 and later 30% 40% 35% Frontier’s taxable income for 2014 is $605,000 Taxable income is expected in all future years c19BExercises.qxd 3/14/13 12:01 PM Page B Exercises Instructions (a) Prepare the journal entry for Frontier to record income taxes payable, deferred income taxes, and income tax expense for 2014, assuming that there were no deferred taxes at the end of 2013 (b) Prepare the journal entry for Frontier to record income taxes payable, deferred income taxes, and income tax expense for 2014, assuming that there was a balance of $136,000 in a Deferred Tax Liability account at the end of 2013 E19-14B (Deferred Tax Asset with and without Valuation Account) NovaSci, Inc has a deferred tax asset account with a balance of $255,000 at the end of 2013 due to a single cumulative temporary difference of $850,000 At the end of 2014 this same temporary difference has decreased to a cumulative amount of $750,000 Taxable income for 2014 is $650,000 The tax rate is 30% for all years No valuation account related to the deferred tax asset is in existence at the end of 2013 Instructions (a) Record income tax expense, deferred income taxes, and income taxes payable for 2014, 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 one-half of the deferred tax asset will not be realized, prepare the journal entry at the end of 2014 to record the valuation account E19-15B (Deferred Tax Asset with Previous Valuation Account) Assume the same information as E19-14B, except that at the end of 2013, NovaSci, Inc had a valuation account related to its deferred tax asset of $125,000 Instructions (a) Record income tax expense, deferred income taxes, and income taxes payable for 2014, 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 2014, assuming that it is more likely than not that one-half of the deferred tax asset will be realized E19-16B (Deferred Tax Asset, Change in Tax Rate, Prepare Section of Income Statement) Sky Time Media Corporation’s only temporary difference at the beginning and end of 2014 is caused by a $2.5 million litigation accrual that is expected to be settled in 2016 The related deferred tax asset at the beginning of the year is $1,000,000 In the third quarter of 2014, a new tax rate of 45% is enacted into law and is scheduled to become effective for 2016 Taxable income for 2014 is $7,250,000, and taxable income is expected in all future years Instructions (a) Determine the amount reported as a deferred tax asset at the end of 2014 Indicate proper classification(s) (b) Prepare the journal entry (if any) necessary to adjust the deferred tax asset when the new tax rate is enacted into law (c) Draft the income tax expense portion of the income statement for 2014 Begin with the line “Income before income taxes.” Assume no permanent differences exist E19-17B (Two Temporary Differences, Tracked through Years, Multiple Rates) Taxable income and pretax financial income would be identical for Ursula Co except for its depreciation on equipment purchased in 2014 for $500,000 and estimated costs of warranties The following income computations have been prepared Taxable income 2014 2015 2016 Excess of revenues over expenses (excluding two temporary differences) Tax Depreciation Expenditures for warranties $ 265,000 (125,000) (10,000) $ 630,000 (200,000) (50,000) $ 250,000 (175,000) (15,000) $ 130,000 $ 380,000 $ Pretax financial income 2014 2015 2016 Excess of revenues over expenses (excluding two temporary differences) Book depreciation Estimated cost of warranties $ 265,000 (100,000) (75,000) $ 630,000 (100,000) –0– $ 250,000 (100,000) –0– $ 90,000 $ 530,000 $ 150,000 Taxable income Income before taxes 60,000 The tax rates in effect are: 2014 and 2015, 30%; 2016 and thereafter, 40% All tax rates were enacted into law on January 1, 2014 No deferred income taxes existed at the beginning of 2014 Taxable income is expected in all future years • c19BExercises.qxd • 3/14/13 12:01 PM Page Chapter 19 Accounting for Income Taxes Instructions Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2014, 2015, and 2016 E19-18B (Three Differences, Multiple Rates, Future Taxable Income) During 2014, Cumpuinc’s first year of operations, the company reports pretax financial income at $231,000 Cumpuinc’s enacted tax rate is 40% for 2014 and 2015 and 30% for all later years Cumpuinc expects to have taxable income in each of the next years The effects on future tax returns of temporary differences existing at December 31, 2014, are summarized below Future Years Future taxable (deductible) amounts: Warranty costs Depreciation Installment sales 2015 2016 2017 2018 2019 Total $(20,000) (20,000) 60,000 $(60,000) 12,000 75,000 $(25,000) 12,000 $12,000 $12,000 $(105,000) 28,000 135,000 Instructions (a) Complete the schedule below to compute deferred taxes at December 31, 2014 Temporary Difference Warranty costs Depreciation Installment sales Totals Future Taxable (Deductible) Amounts December 31, 2014 Tax Rate Deferred Tax (Asset) Liability $(105,000) 28,000 135,000 $ (b) Compute taxable income for 2014 (c) Prepare the journal entry to record income tax payable, deferred taxes, and income tax expense for 2014 E19-19B (Two Differences, One Rate, Beginning Deferred Balance, Compute Pretax Financial Income) Low4All Stores establishes a $200 million liability at the end of 2014 for the estimated costs to settle a class-action lawsuit alleging discrimination The settlement is expected to be approved by the Court in 2015 at which time the settlement will be paid The company also has $125 million of temporary differences the end of 2014 due to installment sales The $125 million will reverse in equal installments over the next five years The enacted tax rate for all years is 40%, and the company has $351 million of taxable income in 2014 Low4All Stores expects to have taxable income in 2015 Instructions (a) Determine the deferred taxes to be reported at the end of 2014 (b) Indicate how the deferred taxes computed in (a) are to be reported on the balance sheet (c) Assuming that the only deferred tax account at the beginning of 2014 was a deferred tax liability of $60 million; draft the income tax expense portion of the income statement for 2014, beginning with the line “Income before income taxes.” (Hint: You must first compute (1) the amount of temporary difference underlying the beginning $60 million deferred tax liability, then (2) the amount of temporary differences originating or reversing during the year, then (3) the amount of pretax financial income.) E19-20B (Two Differences, No Beginning Deferred Taxes, Multiple Rates) Education Sciences Company, in its first year of operations, has the following differences between the book basis and tax basis of its assets and liabilities at the end of 2014 Equipment (net) Estimated warranty liability Book Basis Tax Basis $800,000 150,000 $750,000 –0– It is estimated that the warranty liability will be settled in 2015 ($100,000) and 2016 ($50,000) The difference in equipment (net) will result in taxable (deductible) amounts of $(200,000) in 2015, $(150,000) in 2016, and $200,000 in 2017 and 2018 The company has taxable income of $350,000 in 2014 As of the beginning of 2014, the enacted tax rate is 40% for 2014 and 2015, and 35% for 2016 and thereafter Education Sciences expects to report taxable income through 2018 c19BExercises.qxd 3/14/13 12:01 PM Page B Exercises Instructions (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2014 (b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2014 E19-21B (Two Temporary Differences, Multiple Rates, Future Taxable Income) Jones Clothier Inc has two temporary differences at the end of 2014 The first difference stems from installment sales, and the second one results from the accrual for costs associated with closing a factory Jones’s assistant controller developed a schedule of future taxable and deductible amounts related to these temporary differences as follows Taxable amounts Deductible amounts 2015 2016 2017 2018 $ 80,000 (150,000) $80,000 (60,000) $60,000 $40,000 $ (70,000) $20,000 $60,000 $40,000 As of the beginning of 2014, the enacted tax rate is 40% for 2014 through 2016, and 30% for 2017 through 2019 At the beginning of 2014, the company had no deferred income taxes on its balance sheet Taxable income for 2014 is $150,000 Taxable income is expected in all future years Instructions (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014 (b) Indicate how deferred income taxes would be classified on the balance sheet at the end of 2014 E19-22B (Two Differences, One Rate, First Year) The differences between the book basis and tax basis of the assets and liabilities of Host Five Inc at the end of 2014 are presented below Accounts receivable Warranty accrual Book Basis Tax Basis $180,000 120,000 $–0– –0– It is estimated that the warranty accrual will be settled in 2015 ($75,000) and 2016 ($45,000) The difference in accounts receivable will result in taxable amounts of $60,000 in 2015, 2016, and 2017 The company has taxable income of $200,000 in 2014 and is expected to have taxable income in each of the following years Its enacted tax rate is 35% for all years This is the company’s first year of operations Instructions (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2014 (b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2014 E19-23B (NOL Carryback and Carryforward, Valuation Account versus No Valuation Account) Public Wares Corporation 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 and 2013 is the company’s first year of operations.) Year Pretax Income (Loss) Tax Rate 2013 2014 2015 2016 $230,000 (335,000) (50,000) 265,000 40% 40% 35% 30% The tax rates listed were all enacted by the beginning of 2013 Instructions (a) Prepare the journal entries for the years 2013 through 2016 to record income tax expense (benefit) and income tax payable (refundable) and the tax effects of the loss carryback and carryforward, assuming that the benefits of any loss carryforwards are judged more likely than not to be realized in the future (b) Prepare the income tax section of the 2014 income statement beginning with the line “Operating loss before income taxes.” (c) Prepare the income tax section of the 2015 income statement beginning with the line “Operating loss before income taxes.” • c19BExercises.qxd • 3/14/13 12:01 PM Page Chapter 19 Accounting for Income Taxes E19-24B (NOL Carryback and Carryforward, Valuation Account Needed) Assume the same information as E19-23B, except that based on the weight of available evidence in 2014, it is more likely than not that 40 percent of the benefits of any loss carryforward will not be realized In 2015, the benefits of any loss carryforwards are judged more likely than not to be realized in the future Instructions (a) Prepare the journal entries for the years 2013 through 2016 to record income tax expense (benefit) and income tax payable (refundable) and the tax effects of the loss carryback and carryforward, (b) Prepare the income tax section of the 2014 income statement beginning with the line “Operating loss before income taxes.” (c) Prepare the income tax section of the 2015 income statement beginning with the line “Operating loss before income taxes.” E19-25B (NOL Carryback and Carryforward, Valuation Account Needed) Topper Company reported the following pretax financial income (loss) for the years 2013 through 2017 2013 2014 2015 2016 2017 $ 70,000 45,000 (260,000) 90,000 215,000 Pretax financial income (loss) and taxable income (loss) were the same for all years involved The enacted tax rate was 30% for 2013 through 2015, and 35% for 2016 and thereafter Assume the carryback provision is used first for net operating losses Instructions (a) Prepare the journal entries for the years 2013 through 2017 to record income tax expense, income tax 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 60 percent of the benefits of the loss carryforward will not be realized (b) Prepare the income tax section of the 2015 income statement beginning with the line “Income (loss) before income taxes.” ...c19BExercises.qxd • 3/14/13 12:01 PM Page Chapter 19 Accounting for Income Taxes Deferred tax liability, January 1, 2012, $0... is recorded by a _ (debit, credit) to the Income Tax Expense account c19BExercises.qxd 3/14/13 12:01 PM Page B Exercises (h) If a corporation’s “Income tax payable” on the balance sheet totals... is more likely than not that the related benefits will be realized • c19BExercises.qxd • 3/14/13 12:01 PM Page Chapter 19 Accounting for Income Taxes Instructions (a) What entry(ies) for income