Chapter 19 Accounting for Income Taxes

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Chapter 19 Accounting for Income Taxes


QUESTIONS
1. Explain the difference between pretax financial income and taxable income.
2. What are the two objectives of accounting for income taxes?
3. Interest on municipal bonds is referred to as a permanent difference when determining the proper amount to report for deferred taxes. Explain the meaning of permanent differences, and give two other examples.
4. Explain the meaning of a temporary difference as it relates to deferred tax computations, and give three examples.
5. Differentiate between an originating temporary difference and a reversing difference.
6. The book basis of depreciable assets for Erwin Co. is $900,000, and the tax basis is $700,000 at the end of 2015.
The enacted tax rate is 34% for all periods. Determine the amount of deferred taxes to be reported on the balance sheet at the end of 2015.
7. Roth Inc. has a deferred tax liability of $68,000 at the beginning of 2015. At the end of 2015, 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 2015.
8. What is the difference between a future taxable amount and a future deductible amount? When is it appropriate to record a valuation account for a deferred tax asset?
9. Pretax financial income for Lake Inc. is $300,000, and its taxable income is $100,000 for 2015. 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, compute the amount of income tax expense to report in 2015. No deferred income taxes existed at the beginning of the year.
10. How are deferred tax assets and deferred tax liabilities reported on the balance sheet?
11. Describe the procedures involved in segregating various deferred tax amounts into current and noncurrent categories.
12. How is it determined whether deferred tax amounts are considered to be “related” to specific asset or liability amounts?
13. At the end of the year, Falabella Co. has pretax financial income of $550,000. Included in the $550,000 is $70,000 interest income on municipal bonds, $25,000 fine for dumping hazardous waste, and depreciation of $60,000.
Depreciation for tax purposes is $45,000. Compute income taxes payable, assuming the tax rate is 30% for all periods.
14. Addison Co. has one temporary difference at the beginning of 2014 of $500,000. The deferred tax liability established for this amount is $150,000, based on a tax rate of
30%. The temporary difference will provide the following taxable amounts: $100,000 in 2015, $200,000 in 2016, and $200,000 in 2017. If a new tax rate for 2017 of 20% is enacted into law at the end of 2014, what is the journal entry necessary in 2014 (if any) to adjust deferred taxes?
15. What are some of the reasons that the components of income tax expense should be disclosed and a reconciliation between the effective tax rate and the statutory tax rate be provided?
16. Differentiate between “loss carryback” and “loss carryforward.”
Which can be accounted for with the greater certainty when it arises? Why?
17. What are the possible treatments for tax purposes of a net operating loss? What are the circumstances that determine the option to be applied? What is the proper treatment of a net operating loss for financial reporting purposes?
18. What controversy relates to the accounting for net operating loss carryforwards?
19. What is an uncertain tax position, and what are the general guidelines for accounting for uncertain tax positions?



BRIEF EXERCISES

BE19-1 In 2014, Amirante Corporation had pretax financial income of $168,000 and taxable income of $120,000. The difference is due to the use of different depreciation methods for tax and accounting purposes. The effective tax rate is 40%. Compute the amount to be reported as income taxes payable at
December 31, 2014.

BE19-2 Oxford Corporation began operations in 2014 and reported pretax financial income of $225,000 for the year. Oxford’s tax depreciation exceeded its book depreciation by $40,000. Oxford’s tax rate for 2014 and years thereafter is 30%. In its December 31, 2014, balance sheet, what amount of deferred tax liability should be reported?

BE19-3 Using the information from BE19-2, assume this is the only difference between Oxford’s pretax financial income and taxable income. Prepare the journal entry to record the income tax expense, deferred income taxes, and income taxes payable, and show how the deferred tax liability will be classified on the
December 31, 2014, balance sheet.

BE19-4 At December 31, 2014, Appaloosa Corporation had a deferred tax liability of $25,000. At December
31, 2015, the deferred tax liability is $42,000. The corporation’s 2015 current tax expense is $48,000. What amount should Appaloosa report as total 2015 income tax expense?

BE19-5 At December 31, 2014, Suffolk Corporation had an estimated warranty liability of $105,000 for accounting purposes and $0 for tax purposes. (The warranty costs are not deductible until paid.) The effective tax rate is 40%. Compute the amount Suffolk should report as a deferred tax asset at December 31, 2014.

BE19-6 At December 31, 2014, Percheron Inc. had a deferred tax asset of $30,000. At December 31, 2015, the deferred tax asset is $59,000. The corporation’s 2015 current tax expense is $61,000. What amount should
Percheron report as total 2015 income tax expense?

BE19-7 At December 31, 2014, Hillyard Corporation has a deferred tax asset of $200,000. After a careful review of all available evidence, it is determined that it is more likely than not that $60,000 of this deferred tax asset will not be realized. Prepare the necessary journal entry.

BE19-8 Mitchell Corporation had income before income taxes of $195,000 in 2014. Mitchell’s current income tax expense is $48,000, and deferred income tax expense is $30,000. Prepare Mitchell’s 2014 income statement, beginning with Income before income taxes.

BE19-9 Shetland Inc. had pretax financial income of $154,000 in 2014. Included in the computation of that amount is insurance expense of $4,000 which is not deductible for tax purposes. In addition, depreciation for tax purposes exceeds accounting depreciation by $10,000. Prepare Shetland’s journal entry to record 2014 taxes, assuming a tax rate of 45%.

BE19-10 Clydesdale Corporation has a cumulative temporary difference related to depreciation of $580,000 at December 31, 2014. This difference will reverse as follows: 2015, $42,000; 2016, $244,000; and 2017, $294,000. Enacted tax rates are 34% for 2015 and 2016, and 40% for 2017. Compute the amount Clydesdale should report as a deferred tax liability at December 31, 2014.

BE19-11 At December 31, 2014, Fell Corporation had a deferred tax liability of $680,000, resulting from future taxable amounts of $2,000,000 and an enacted tax rate of 34%. In May 2015, a new income tax act is signed into law that raises the tax rate to 40% for 2015 and future years. Prepare the journal entry for Fell to adjust the deferred tax liability.

BE19-12 Conlin Corporation had the following tax information.
Year Taxable Income Tax Rate Taxes Paid
2012 $300,000 35% $105,000
2013 $325,000 30% $ 97,500 2014 $400,000 30% $120,000
In 2015, Conlin suffered a net operating loss of $480,000, which it elected to carry back. The 2015 enacted tax rate is 29%. Prepare Conlin’s entry to record the effect of the loss carryback.

BE19-13 Rode Inc. incurred a net operating loss of $500,000 in 2014. Combined income for 2012 and 2013 was $350,000. The tax rate for all years is 40%. Rode elects the carryback option. Prepare the journal entries to record the benefits of the loss carryback and the loss carryforward. Rode expects to return to profitability in 2015.

BE19-14 Use the information for Rode Inc. given in BE19-13. Assume that it is more likely than not that the entire net operating loss carryforward will not be realized in future years. Prepare all the journal entries necessary at the end of 2014.

BE19-15 Youngman Corporation has temporary differences at December 31, 2014, that result in the following deferred taxes.
Deferred tax liability—current $38,000
Deferred tax asset—current $62,000
Deferred tax liability—noncurrent $96,000
Deferred tax asset—noncurrent $27,000
Indicate how these balances would be presented in Youngman’s December 31, 2014, balance sheet.


EXERCISES  
E19-1 (One Temporary Difference, Future Taxable Amounts, One Rate, No Beginning Deferred
Taxes) South Carolina Corporation has one temporary difference at the end of 2014 that will reverse and cause taxable amounts of $55,000 in 2015, $60,000 in 2016, and $65,000 in 2017. South Carolina’s pretax financial income for 2014 is $300,000, and the tax rate is 30% 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.”

E19-2 (Two Differences, No Beginning Deferred Taxes, Tracked through 2 Years) The following information is available for Wenger Corporation for 2013 (its first year of operations).
1. Excess of tax depreciation over book depreciation, $40,000. This $40,000 difference will reverse equally over the years 2014–2017.
2. Deferral, for book purposes, of $20,000 of rent received in advance. The rent will be recognized in 2014.
3. Pretax financial income, $300,000.
4. Tax rate for all years, 40%.
Instructions

(a) Compute taxable income for 2013.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013.
(c) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014, assuming taxable income of $325,000.

E19-3 (One Temporary Difference, Future Taxable Amounts, One Rate, Beginning Deferred Taxes)
Bandung Corporation began 2014 with a $92,000 balance in the Deferred Tax Liability account. At the end of 2014, the related cumulative temporary difference amounts to $350,000, and it will reverse evenly over the next 2 years. Pretax accounting income for 2014 is $525,000, the tax rate for all years is 40%, and taxable income for 2014 is $405,000.
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.”

E19-4 (Three Differences, Compute Taxable Income, Entry for Taxes) Zurich Company reports pretax financial income of $70,000 for 2014. The following items cause taxable income to be different than pretax financial income.
1. Depreciation on the tax return is greater than depreciation on the income statement by $16,000.
2. Rent collected on the tax return is greater than rent recognized on the income statement by $22,000.
3. 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 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.

E19-5 (Two Temporary Differences, One Rate, Beginning Deferred Taxes) The following facts relate to
Krung Thep Corporation.
1. Deferred tax liability, January 1, 2014, $40,000.
2. Deferred tax asset, January 1, 2014, $0.
3. Taxable income for 2014, $95,000.
4. Pretax financial income for 2014, $200,000.
5. Cumulative temporary difference at December 31, 2014, giving rise to future taxable amounts, $240,000.
6. Cumulative temporary difference at December 31, 2014, giving rise to future deductible amounts, $35,000.
7. Tax rate for all years, 40%.
8. 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.”

E19-6 (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) ______ 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.
(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.

E19-7 (Terminology, Relationships, Computations, Entries)
Instructions

Complete the following statements by filling in the blanks.
(a) In a period in which a taxable temporary difference reverses, the reversal will cause taxable income to be _______ (less than, greater than) pretax financial income.
(b) If a $76,000 balance in Deferred Tax Asset was computed by use of a 40% rate, the underlying cumulative temporary difference amounts to $_______.
(c) Deferred taxes ________ (are, are not) recorded to account for permanent differences.
(d) If a taxable temporary difference originates in 2014, it will cause taxable income for 2014 to be ________ (less than, greater than) pretax financial income for 2014.
(e) If total tax expense is $50,000 and deferred tax expense is $65,000, then the current portion of the expense computation is referred to as current tax _______ (expense, benefit) of $_______.
(f) If a corporation’s tax return shows taxable income of $100,000 for Year 2 and a tax rate of 40%, how much will appear on the December 31, Year 2, balance sheet for “Income taxes payable” if the company has made estimated tax payments of $36,500 for Year 2? $________.
(g) An increase in the Deferred Tax Liability account on the balance sheet is recorded by a _______
(debit, credit) to the Income Tax Expense account.
(h) An income statement that reports current tax expense of $82,000 and deferred tax benefit of $23,000 will report total income tax expense of $________.
(i) A valuation account is needed whenever it is judged to be _______ that a portion of a deferred tax asset _______ (will be, will not be) realized.
(j) If the tax return shows total taxes due for the period of $75,000 but the income statement shows total income tax expense of $55,000, the difference of $20,000 is referred to as deferred tax _______
(expense, benefit).

E19-8 (Two Temporary Differences, One Rate, 3 Years) Button Company has the following two temporary differences between its income tax expense and income taxes payable.
The income tax rate for all years is 40%.
Instructions

(a) Assuming there were no temporary differences prior to 2014, prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014, 2015, and 2016.
(b) Indicate how deferred taxes will be reported on the 2016 balance sheet. Button’s product warranty is for 12 months.
(c) Prepare the income tax expense section of the income statement for 2016, beginning with the line “Pretax financial income.”

E19-9 (Carryback and Carryforward of NOL, No Valuation Account, No Temporary Differences) The pretax financial income (or loss) figures for Jenny Spangler Company are as follows. 2014 2015 2016
Pretax fi nancial income $840,000 $910,000 $945,000
Excess depreciation expense on tax return (30,000) (40,000) (10,000)
Excess warranty expense in fi nancial income 20,000 10,000 8,000
Taxable income $830,000 $880,000 $943,000
2009 $160,000
2010 250,000
2011 80,000
2012 (160,000)
2013 (380,000) 2014 120,000
2015 100,000
Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a
45% tax rate for 2009 and 2010 and a 40% tax rate for the remaining years.
Instructions

Prepare the journal entries for the years 2011 to 2015 to record income tax expense and the effects of the net operating loss carrybacks and carryforwards assuming Jenny Spangler Company 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.)

E19-10 (Two NOLs, No Temporary Differences, No Valuation Account, Entries and Income Statement)
Felicia Rashad Corporation has pretax financial income (or loss) equal to taxable income (or loss) from 2006 through 2014 as follows.
Income (Loss) Tax Rate
2006 $ 29,000 30%
2007 40,000 30%
2008 17,000 35%
2009 48,000 50%
2010 (150,000) 40%
2011 90,000 40%
2012 30,000 40%
2013 105,000 40% 2014 (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 2010?
(b) Indicate what the income tax expense portion of the income statement for 2010 should look like.
Assume all income (loss) relates to continuing operations.
(c) What entry for income taxes should be recorded in 2011?
(d) How should the income tax expense section of the income statement for 2011 appear?
(e) What entry for income taxes should be recorded in 2014?
(f) How should the income tax expense section of the income statement for 2014 appear?

E19-11 (Three Differences, Classify Deferred Taxes) At December 31, 2013, 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 2014. The loss will be deducted on the tax return when paid. (50,000)
3. Accrual method used for book purposes and installment method used for tax purposes for an isolated installment sale of an investment. 225,000 $375,000
In analyzing the temporary differences, you find that $30,000 of the depreciation temporary difference will reverse in 2014, and $120,000 of the temporary difference due to the installment sale will reverse in 2014.
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,
2013, balance sheet.

E19-12 (Two Temporary Differences, One Rate, Beginning Deferred Taxes, Compute Pretax Financial
Income) The following facts relate to Duncan Corporation.
1. Deferred tax liability, January 1, 2014, $60,000.
2. Deferred tax asset, January 1, 2014, $20,000.
3. Taxable income for 2014, $105,000.
4. Cumulative temporary difference at December 31, 2014, giving rise to future taxable amounts, $230,000.
5. Cumulative temporary difference at December 31, 2014, giving rise to future deductible amounts, $95,000.
6. Tax rate for all years, 40%. No permanent differences exist.
7. 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.

E19-13 (One Difference, Multiple Rates, Effect of Beginning Balance versus No Beginning Deferred
Taxes) At the end of 2013, Lucretia McEvil Company has $180,000 of cumulative temporary differences that will result in reporting future taxable amounts as shown on the next page.
Tax rates enacted as of the beginning of 2012 are:
McEvil’s taxable income for 2013 is $320,000. Taxable income is expected in all future years.
Instructions

(a) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2013, assuming that there were no deferred taxes at the end of 2012.
(b) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2013, assuming that there was a balance of $22,000 in a Deferred Tax Liability account at the end of 2012.

E19-14 (Deferred Tax Asset with and without Valuation Account) Jennifer Capriati Corp. has a deferred tax asset account with a balance of $150,000 at the end of 2013 due to a single cumulative temporary difference of $375,000. At the end of 2014, this same temporary difference has increased to a cumulative amount of $450,000. Taxable income for 2014 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 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 $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2014 to record the valuation account.

E19-15 (Deferred Tax Asset with Previous Valuation Account) Assume the same information as E19-14, except that at the end of 2013, 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 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 none of the deferred tax asset will be realized.

E19-16 (Deferred Tax Liability, Change in Tax Rate, Prepare Section of Income Statement) Novotna
Inc.’s only temporary difference at the beginning and end of 2013 is caused by a $3 million deferred gain for tax purposes for an installment sale of a plant asset, and the related receivable (only one-half of which is classified as a current asset) is due in equal installments in 2014 and 2015. The related deferred tax liability at the beginning of the year is $1,200,000. In the third quarter of 2013, a new tax rate of 34% is enacted into law and is scheduled to become effective for 2015. Taxable income for 2013 is $5,000,000, and taxable income is expected in all future years.
Instructions

(a) Determine the amount reported as a deferred tax liability at the end of 2013. Indicate proper classification(s).
(b) Prepare the journal entry (if any) necessary to adjust the deferred tax liability when the new tax rate is enacted into law.
(c) Draft the income tax expense portion of the income statement for 2013. Begin with the line “Income before income taxes.” Assume no permanent differences exist.

E19-17 (Two Temporary Differences, Tracked through 3 Years, Multiple Rates) Taxable income and pretax financial income would be identical for Huber Co. except for its treatments of gross profit on installment sales and estimated costs of warranties. The income computations shown on page 1164 have been prepared. 2014 $ 60,000
2015 50,000
2016 40,000
2017 30,000 $180,000
2012 and 2013 40% 2014 and 2015 30%
2016 and later 25%
The tax rates in effect are 2013, 40%; 2014 and 2015, 45%. All tax rates were enacted into law on January 1,
2013. No deferred income taxes existed at the beginning of 2013. Taxable income is expected in all future years.
Instructions

Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013, 2014, and 2015.

E19-18 (Three Differences, Multiple Rates, Future Taxable Income) During 2014, Kate Holmes Co.’s first year of operations, the company reports pretax financial income at $250,000. Holmes’s enacted tax rate is
45% for 2014 and 40% for all later years. Holmes expects to have taxable income in each of the next 5 years.
The effects on future tax returns of temporary differences existing at December 31, 2014, are summarized as follows.
Taxable income 2013 2014 2015
Excess of revenues over expenses
(excluding two temporary differences) $160,000 $210,000 $90,000
Installment gross profit collected 8,000 8,000 8,000
Expenditures for warranties (5,000) (5,000) (5,000)
Taxable income $163,000 $213,000 $93,000
Pretax financial income 2013 2014 2015
Excess of revenues over expenses
(excluding two temporary differences) $160,000 $210,000 $90,000
Installment gross profit earned 24,000 –0– –0–
Estimated cost of warranties (15,000) –0– –0–
Income before taxes $169,000 $210,000 $90,000
Future Years
2015 2016 2017 2018 2019 Total
Future taxable (deductible) amounts:
Installment sales $32,000 $32,000 $32,000 $ 96,000
Depreciation 6,000 6,000 6,000 $6,000 $6,000 30,000
Unearned rent (50,000) (50,000) (100,000)
Instructions

(a) Complete the schedule below to compute deferred taxes at December 31, 2014.
(b) Compute taxable income for 2014.
(c) Prepare the journal entry to record income taxes payable, deferred taxes, and income tax expense for 2014.

E19-19 (Two Differences, One Rate, Beginning Deferred Balance, Compute Pretax Financial Income)
Andy McDowell Co. establishes a $100 million liability at the end of 2014 for the estimated site-cleanup costs at two of its manufacturing facilities. All related closing costs will be paid and deducted on the tax return in 2015. Also, at the end of 2014, the company has $50 million of temporary differences due to excess depreciation for tax purposes, $7 million of which will reverse in 2015.
The enacted tax rate for all years is 40%, and the company pays taxes of $64 million on $160 million of taxable income in 2014. McDowell expects to have taxable income in 2015.
Instructions

(a) Determine the deferred taxes to be reported at the end of 2015.
(b) Indicate how the deferred taxes computed in (a) are to be reported on the balance sheet.
Future Taxable December 31, 2014
(Deductible) Tax Deferred Tax
Temporary Difference Amounts Rate (Asset) Liability
Installment sales $ 96,000
Depreciation 30,000
Unearned rent (100,000)
(c) Assuming that the only deferred tax account at the beginning of 2014 was a deferred tax liability of $10,000,000, 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 $10,000,000 deferred tax liability, then (2) the amount of temporary differences originating or reversing during the year, and then (3) the amount of pretax financial income.)

E19-20 (Two Differences, No Beginning Deferred Taxes, Multiple Rates) Teri Hatcher Inc., 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 2013.
It is estimated that the warranty liability will be settled in 2014. The difference in equipment (net) will result in taxable amounts of $20,000 in 2014, $30,000 in 2015, and $10,000 in 2016. The company has taxable income of $520,000 in 2013. As of the beginning of 2013, the enacted tax rate is 34% for 2013–2015, and 30% for 2016. Hatcher expects to report taxable income through 2016.
Instructions

(a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013.
(b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2013.

E19-21 (Two Temporary Differences, Multiple Rates, Future Taxable Income) Nadal Inc. has two temporary differences at the end of 2013. The first difference stems from installment sales, and the second one results from the accrual of a loss contingency. Nadal’s accounting department has developed a schedule of future taxable and deductible amounts related to these temporary differences as follows.
As of the beginning of 2013, the enacted tax rate is 34% for 2013 and 2014, and 38% for 2015–2018. At the beginning of 2013, the company had no deferred income taxes on its balance sheet. Taxable income for
2013 is $500,000. 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 2013.
(b) Indicate how deferred income taxes would be classified on the balance sheet at the end of 2013.

E19-22 (Two Differences, One Rate, First Year) The differences between the book basis and tax basis of the assets and liabilities of Castle Corporation at the end of 2013 are presented below.
Book Basis Tax Basis
Equipment (net) $400,000 $340,000
Estimated warranty liability $200,000 $ –0– 2014 2015 2016 2017
Taxable amounts $40,000 $50,000 $60,000 $80,000
Deductible amounts (15,000) (19,000) $40,000 $35,000 $41,000 $80,000
It is estimated that the litigation liability will be settled in 2014. The difference in accounts receivable will result in taxable amounts of $30,000 in 2014 and $20,000 in 2015. The company has taxable income of $350,000 in 2013 and is expected to have taxable income in each of the following 2 years. Its enacted tax rate is 34% for all years. This is the company’s first year of operations. The operating cycle of the business is 2 years.
Instructions

(a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013.
(b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2013.
Book Basis Tax Basis
Accounts receivable $50,000 $–0–
Litigation liability 30,000 –0–

E19-23 (NOL Carryback and Carryforward, Valuation Account versus No Valuation Account) 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.)
The tax rates listed were all enacted by the beginning of 2012.
Instructions

(a) Prepare the journal entries for the years 2012–2015 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 2014 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 2014 income statement beginning with the line “Operating loss before income taxes.”
(c) Prepare the journal entries for 2014 and 2015, 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 2014 income statement beginning with the line “Operating loss before income taxes.”

E19-24 (NOL Carryback and Carryforward, Valuation Account Needed) Beilman 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 2012.
Instructions

(a) Prepare the journal entries for years 2012–2015 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.
(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 “Income before income taxes.”

E19-25 (NOL Carryback and Carryforward, Valuation Account Needed) Meyer reported the following pretax financial income (loss) for the years 2012–2016.
Pretax financial income (loss) and taxable income (loss) were the same for all years involved. The enacted tax rate was 34% for 2012 and 2013, and 40% for 2014–2016. Assume the carryback provision is used first for net operating losses.
2012 $240,000
2013 350,000 2014 120,000
2015 (570,000)
2016 180,000
Year Pretax Income (Loss) Tax Rate
2012 $120,000 34%
2013 90,000 34% 2014 (280,000) 38%
2015 220,000 38%
Year Pretax Income (Loss) Tax Rate
2012 $120,000 40%
2013 90,000 40% 2014 (280,000) 45%
2015 120,000 45%
Problems 1167
Instructions

(a) Prepare the journal entries for the years 2014–2016 to record income tax expense, 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-fifth 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.”
Pretax financial income for each year includes a nondeductible expense of $30,000 (never deductible for tax purposes). The remainder of the difference between pretax financial income and taxable income in each period is due to one depreciation temporary difference. No deferred income taxes existed at the beginning of 2014.
Instructions

(a) Prepare journal entries to record income taxes in all 4 years. Assume that the change in the tax rate to 40% was not enacted until the beginning of 2015.
(b) Prepare the income statement for 2015, beginning with Income before income taxes.
See the book’s companion website, at www.wiley.com/college/kieso, for an additional set of exercises.

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