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ACCT 557 Suggested Review Assignments

BE 19-8, BE 19-10, BE 19-14, E 19-1, E19-6, E19-7

BE19-8 Mitchell Corporation had income before income taxes of $195,000 in 2012. Mitchells current income tax expense is $48,000, and deferred income tax expense is $30,000. Prepare Mitchells 2012 income statement, beginning with Income before income taxes.
Income before taxes Income Tax Expense Current $ 48,000 Deferred $ 30,000 Net Income $ 195,000

$ 78,000 $ 117,000

Income Tax Expense Deferred Tax Liability ($120,000 x 40%) Income Tax Payable ($300,000 x 40%) 168,000 48,000 120,000

BE19-10 Clydesdale Corporation has a cumulative temporary difference related to depreciation of $580,000 at December 31, 2012. This difference will reverse as follows: 2013, $42,000; 2014, $244,000; and 2015, $294,000. Enacted tax rates are 34% for 2013 and 2014, and 40% for 2015. Compute the amount Clydesdale should report as a deferred tax liability at December 31, 2012.

2013 $ 42,000 *34% 14,280

2014 $ 244,000 *34% 82,960

2015 $ 294,000 *40% 117,600 =

Deferred Tax Liability

$ 214,840

BE19-11 At December 31, 2012, 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 2013, a new income tax act is signed into law that raises the tax rate to 40% for 2013 and future years. Prepare the journal entry for Fell to adjust the deferred tax liability.

$ 2,000,000 * 40 % = 800,000 New Deferred tax liability (600,000) Existing Deferred tax liability Provision $120,000

Income Tax Expense Deferred Tax Liability

$ 120,000Dr $ 120,000Cr

BE19-13 Rode Inc. incurred a net operating loss of $500,000 in 2012. Combined income for 2010 and 2011 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.

Net Profit/Loss Tax Rate Tax Paid

2010 & 2011 $350,000 40% $140,000

2012 Benefit Due c/f ($500,000) = (150,000) 40% = $60,000

Income Tax Refund Receivable (350,00,000 * 40%) Benefit Due to Loss Carryback (500,000 -350,000) * 40% Deferred tax asset (500,000 350,000) * 40% Benefit Due to Loss Carryback (Income Tax Expense)

140,000 140,000 60,000 60,000

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 2012.
To recognize benefit of loss carryback Income Tax Refund Receivable 140,000 Benefit Due to Loss Carryback (Income Tax Expense) To recognize benefit of loss carryforward Deferred Tax Asset 60,000 Benefit Due to Loss Carryforward (Income Tax Expense) To record allowance amount Benefit Due to Loss Carryforward (Income Tax Expense) 60,000 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value




E19-1 (One Temporary Difference, Future Taxable Amounts, One Rate, No Beginning Deferred Taxes) Starfleet Corporation has one temporary difference at the end of 2012 that will reverse and cause taxable amounts of $55,000 in 2013, $60,000 in 2014, and $75,000 in 2015. Starfleets pretax financial income for 2012 is $400,000, and the tax rate is 30% for all years. There are no deferred taxes at the beginning of 2012. Instructions (a)Compute taxable income and income taxes payable for 2012.

2015 Pretax financial income Future taxable amounts Taxable income 2012 75,000

2014 60,000

2013 55,000

2012 400,000 (190,000) 210,0000

Taxable Income end 2012 Tax rate 30% Current Tax Expense 2012

210,000 *30% 63,000

(b)Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2012.

Future taxable amounts Tax Rate Deferred Tax liability end

75,000 30% 22,500

60,000 30% 18,000

55,000 30% 16,500

190,000 57,000

Income Tax Expense Income Taxes Payable Deferred Tax Liability

120,000 63,000 57,000

(c)Prepare the income tax expense section of the income statement for 2012, beginning with the line Income before income taxes.
Income before Taxes Income Tax Expense Current Deferred Net Income 400,000 63,000 57,000

120,000 $280,000

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) ___2___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) __1____A landlord collects some rents in advance. Rents received are taxable in the period when they are received. (c) __3____Expenses are incurred in obtaining tax-exempt income. (d) __1____Costs of guarantees and warranties are estimated and accrued for financial reporting purposes. (e) ___2___Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment-sales method for tax purposes. (f) ___3___Interest is received on an investment in tax-exempt municipal obligations.

(g) __2____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. (h) __3____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) ___3___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 (see Notes below). (j) __1____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) ___1___Expenses on stock options are accrued for financial reporting purposes.

Notes; (i) 3: When the cost method is used for financial reporting purposes, the dividends are recognized in the income statement in the period they are received, which is the same period they must be reported on the tax return. However, depending on the level of ownership by the investor, 70 % or 80% of the dividends received from other US corporations may be excluded from taxation because of a dividends received deduction. These tax exempt dividends create a permanent difference.

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 __greater than_____ (less than, greater than) pretax financial income. (b) If a $68,000 balance in Deferred Tax Asset was computed by use of a 40% rate, the underlying cumulative temporary difference amounts to $_170,000______. 68,000/40% (c) Deferred taxes _are not_______ (are, are not) recorded to account for permanent differences.

(d) If a taxable temporary difference originates in 2013, it will cause taxable income for 2013 to be _ less than___ (less than, greater than) pretax financial income for 2013. (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 ___benefit____ (expense, benefit) of $_15,000______. (f) If a corporations tax return shows taxable income of $105,000 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? $_ 5,500__. (105*40%) 36,500 (g) An increase in the Deferred Tax Liability account on the balance sheet is recorded by a __debit_____ (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 $__59,000__. 82,000 23,000 (i) A valuation account is needed whenever it is judged to be _ more likely than not__ that a portion of a deferred tax asset _will not be___ (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 _ benefit___ (expense, benefit).


In regard to deferred taxes, please remember that they result from differences between taxable and financial income. Temporary differences, due to depreciation, installment sale revenue recognition, prepaid expenses or unearned income will reverse. The deferred tax asset or liability appearing on the balance sheet will reflect the remaining differences that will reverse. If a temporary difference causes taxable income to be lower than financial income, a deferred tax liability is created. If a temporary difference causes taxable income to be higher than financial income, a deferred tax asset is created. If both an asset and liability are created, GAAP requires they be separately presented and not netted on the financial statements. Permanent differences do not cause deferred tax assets or liabilities. Deferred tax assets and liabilities are classified as current or non current depending upon when they are expected to reverse or when the benefit of an NOL will be realized. NOL's can be carried back five years and result in a receivable and reduction of income tax expenses. Any carryforward (up to 20 years is permitted) creates a future deferred tax asset and also reduces tax expense.

Pretax financial income is a number shown in a company's income statement prepared under GAAP. The FASBs purpose in establishing accounting principles used to derive a company's earnings is to provide useful information to investors and creditors. Taxable income is a number shown in a corporation's income tax return. It is a statutory definition of income that is used by the IRS to raise money to fund the government and to achieve certain social objectives. A temporary difference shows the amount between the tax basis of an asset or liability and the financial basis on the balance sheet. The results will be an increase to taxable income when the deferred tax asset is recovered (reduced) or a decrease to taxable income when the deferred tax liability is settled. Permanent differences are items that are included in either financial income or taxable income but never recognized in the other. These permanent differences between pretax financial income and taxable income for a given year will not reverse in the future. There are no deferred tax assets or liabilities that result from permanent differences. Examples of permanent differences include interest received on state and municipal obligations, proceeds from life insurance on key executives, and compensation expense associated with certain employee stock options.