Chapter 16 - Alternate Solutions

Chapter 16   Accounting for Income Taxes EXERCISES  futureSince taxable income is less than accounting income, a   taxable   amount   will   occur   when   the   temporary Exercise 16­1

difference   reverses.     This   means   a   deferred   tax   liability should be recorded to reflect the future tax consequences of the temporary difference. ($ in millions)

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

28.0

10.5   17.5

Exercise 16­2 Income tax expense (to balance) Deferred tax asset ($90,000 x 40%) Income tax payable (given)

Alternate Exercise and Problem Solutions

249,000 36,000

  285,000

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Exercise 16­3

Requirement 1  ($ in millions) Current Future  Year 2013

Deductible  Amounts

Temporary difference: Taxable income Enacted tax rate    Tax payable currently    Deferred tax asset

(280) 720   40%

  40%

  288

(112) 

Deferred tax asset:  Ending balance (balance currently needed)  Less: beginning balance ($300 x 40%)    Change needed to achieve desired balance

$ 112    (120 )   $(  8 )

                                                                                                       Journal entries at the end of 2013 Income tax expense (to balance) Deferred tax asset (determined above) Income tax payable (determined above) Valuation allowance – deferred tax asset  Income tax expense

296

40

8   288 40

 Of course, these two entries can be combined.

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Intermediate Accounting, 7e

Exercise 16­3 (concluded)

Requirement 2  ($ in millions)

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

296

Income tax expense 16 Valuation allowance – deferred tax asset ([1/2 x $112]– $40)

8   288

16

 Of course, these two entries can be combined.

Exercise 16­4Requirement 1 

Accounting income Permanent difference:    Municipal bond interest Temporary difference:    Depreciation

                        ($ in thousands) Current Future Year Taxable 2013 Amounts 2014  2015  2016

Future Taxable Amounts

900  (160)    (40 )

(8)

8 40

40

Taxable income

700

    

Enacted tax rate    Tax payable currently    Deferred tax liability

   40%  280

40%

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

16  $16    0 $16

                                                                                                                                                                                                                                     

Journal entry at the end of 2013

Alternate Exercise and Problem Solutions

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

296

16   280

Requirement 2  ($ in thousands)

Pretax accounting income Income tax expense Net income

$900   (296 ) $604

Income Statement

Exercise 16­5

For the fiscal year ended June 30, 2013 Revenues   Cost of goods sold Gross profit   Operating expenses Income from continuing operations before income taxes   Income tax expense Income before extraordinary item and discontinued operations   Loss on discontinued operations,   less applicable income taxes of $16   Extraordinary casualty loss, less    applicable income taxes of $2 Net income

($ in millions)

$415   (175 ) $240   (90    ) $150   (60 ) $90

     (24)      (3 ) $63

PROBLEMS  

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Intermediate Accounting, 7e

Problem 16­1

Requirement 1 

($ in millions)

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

Current Year 2013

Future  Taxable  Amounts 2014    2015   2016

Future  Taxable  Amounts [total]

68  (48 )

16

20

12

48

20   40 %    8

  40% 19.2 

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

$19.2    (  0 .0)  $19 .2

                                                                                                                   Journal entry at the end of 2013 Income tax expense (to balance) Deferred tax liability (determined above) Income tax payable (determined above)

27.2

19.2   8.0

Problem 16­1 (concluded) Requirement 2  ($ in millions) Current Year 2014

Alternate Exercise and Problem Solutions

Future  Taxable  Amounts 2015     2016

Future  Taxable  Amounts [total]

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

60    16

20

12

32

76    40 %     30 .4

  35% 11.2 

Deferred tax liability:

 Ending balance  Less: beginning balance    Change needed to achieve desired balance

$11.2    (  19 .2)  $(8 .0)

                                                                                                                   Journal entry at the end of 2014 Income tax expense (to balance) Deferred tax liability (determined above) Income tax payable (determined above)

22.4 8.0

  30.4

Requirement 3  The balance in the deferred tax liability account at the end of 2014 would have been $12.8 million if the new tax rate had not been enacted: Future taxable amounts Previous tax rate Deferred tax liability

$32 million             40% $12.8 million

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

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Intermediate Accounting, 7e

Problem 16­2Requirement 1  ($ in 000s) Prior Years 2011     2012

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

Current Year 2013

Future Deductible Amounts [total]

(540) 20

(300) (120)   40%   40%   (120 )  (48 )

  40 (480) 420 60 0   40%     0

(40)

 (60 ) (100) 40% (40) 

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

$ 40    (0 )  $40

                                                                                                                                                                                                                                     

Journal entry at the end of 2013 Receivable – income tax refund ($120 + 48) Deferred tax asset (determined above) Income tax benefit (to balance)

Alternate Exercise and Problem Solutions

168 40

208

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Requirement 2  ($ in 000s)

Operating loss before income taxes    Less: Income tax benefit: Tax refund from loss carryback Future tax benefits Net operating loss Problem 16­2 (concluded)

$540     $168    40

   208 $ 332

Requirement 3 

 ($ in 000s) Current Year 2014

Accounting income Temporary differences:    Loss contingency      Operating loss carryforward Taxable income Enacted tax rate       Tax payable     Deferred tax asset

Future Deductible Amounts

240   (40)  (60 ) 140   40%  56

0   40% 0 

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

$   0    (40 )   $(40 )

                                                                                                                   Journal entry at the end of 2014 Income tax expense (to balance) Deferred tax asset (determined above) Income tax payable (determined above)

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96

40 56

Intermediate Accounting, 7e

Alternate Exercise and Problem Solutions

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