Defd Tax in-class Problems to Print

8/3/2019 Defd Tax in-class Problems to Print

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Deferred Tax Examples

Nice to have on paper as we work

problems during class

ACCT 414


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Illustration Assume the company reports revenue in

2007, 2008, and 2009 of $130,000, respectively.

The revenue is reported the same for both GAAP and

tax purposes. For simplification, assume the companyreports one expense, depreciation, over the three

years applying the straight-line method for financial

reporting purposes (GAAP) and MACRS (IRS) for the

tax return. What is the effect on the accounts ofusing the two different depreciation methods?

LO 1 Identifydifferences between pretaxfinancialincomeandtaxableincome.

Fundamentals of Accounting for Income Taxes


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Revenues

Expenses (S/L depreciation)

Pretax financial income

Income tax expense (40%)

$130,000

30,000

$100,000

$40,000

$130,000

2008

30,000

$100,000

$40,000

$130,000

2009

30,000

$100,000

$40,000

$390,000

Total

90,000

$300,000

$120,000

GAAP ReportingGAAP Reporting

RevenuesExpenses (MACRS depreciation)

Pretax financial income

Income tax payable (40%)

$130,000

2007

40,000

$90,000

$36,000

$130,000

2008

30,000

$100,000

$40,000

$130,000

2009

20,000

$110,000

$44,000

$390,000

Total

90,000

$300,000

$120,000

Tax Reporting

2007

LO 1 Identifydifferences between pretaxfinancialincomeandtaxableincome.

Book vs. Tax Difference


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Example Deferred Tax Liability

Assume that Sales Company recognizes $15,000 gross profit from installmentsales for financial accounting in 2006. The gross profit will be taxable at $3,000each year for the next five years. The company earns $10,000 additional incomeeach year and the tax rate is 40%. The following schedule shows taxable income,income tax payable, financial income, and income tax expense for the five year

period.


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Example Deferred Tax Asset

Financial Magazine Company received $15,000 ofsubscriptions in advance for2006. Subscription revenuewill be recognized equally in 2007,2008, and 2009, forfinancial accounting purposes but all of the $15,000 will be

recognized in 2006 for tax purposes. There is additionalincome of $50,000 each year and the tax rate is 40%.


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E19-1 South Carolina Corporation has one temporarydifference at the end of 2007 that will reverse and causetaxable amounts of $55,000 in 2008, $60,000 in 2009, and$65,000 in 2010. South Carolinas pretax financial incomefor 2007 is $300,000, and the tax rate is 30% for all years.There are no deferred taxes at the beginning of 2007.

Instructions

a) Compute taxable income and income taxes payable for 2007.b) Prepare the journal entry to record income tax expense,

deferred income taxes, and income taxes payable for 2007.

South Carolina Corporation


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Columbia Corporation has one temporary differenceat the end of 2007 that will reverse and causedeductible amounts of $50,000 in 2008, $65,000 in2009, and $40,000 in 2010. Columbias pretax

financial income for 2007 is $200,000 and the taxrate is 34% for all years. There are no deferredtaxes at the beginning of 2007. Columbia expectsto be profitable in the future.

Instructions

a) Compute taxable income and income taxes payable for 2007.

b) Prepare the journal entry to record income tax expense,deferred income taxes, and income taxes payable for 2007.

Columbia Corporation


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Zoop Inc. incurred a net operating loss of$500,000 in 2007. Taxable income was$200,000 for 2005 and $200,000 for 2006.

The tax rate for all years is 40%. Zoop electsthe carryback option. Prepare the journalentries to record the benefits of the loss

carryback and the loss carryforward.

Zoop Inc. (NOL)


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Now assume that it is more likely than notthat the entire net operating losscarryforward will not be realized by ZoopInc. in future years. Prepare all thejournal entries necessary at the end of2007.

Zoop Inc. (Variation)


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Valis Corporation had the following tax information.

Valis Corporation (NOL)

Taxable Tax Taxes

Year Income Rate Paid

2004 300,000$ 35% 105,000$

2005 325,000 30% 97,5002006 400,000 30% 120,000

In 2007 Valis suffered a net operating loss of

$450,000, which it elected to carry back. The2007 enacted tax rate is 29%. Prepare Valiss entry

to record the effect of the loss carryback.


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At the end of2002, the corporate tax rate ischanged from 40% to 35%. The new rate iseffective January 1,2004.

The deferred tax account (1/1/2002) is asfollows:

Excess tax depreciation: $3 million

Deferred tax liability: $1.2 million

Related taxable amounts are expected to occurequally over2003,2004, and 2005.

Provide the journal entry to reflect the change.

Example:

Revision ofF

uture Tax Rate

Example:

Revision ofF

uture Tax Rate


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Zurich Companyreports pretaxfinancialincomeof $70,000for2007.Thefollowingitemscausetaxableincometo bedifferentthan pretaxfinancialincome. (1) Depreciationonthetaxreturnisgreaterthandepreciationontheincomestatement by$16,000. (2) Rentcollectedonthetaxreturnisgreaterthan

rentearnedontheincomestatement by $22,000. (3) Finesforpollutionappearasanexpenseof $11,000ontheincomestatement.

Zurichstaxrateis 30%forallyears,andthecompanyexpects

toreporttaxableincomeinallfutureyears.Therearenodeferredtaxesatthe beginningof2007.

Instructions Preparethe journalentrytorecordincometaxexpense,deferredincometaxes,andincometaxes payablefor2007.

Review Problem


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Defd Tax in-class Problems to Print

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