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Chapter 19: 2CA_b (page 1106)

Dexter Company appropriately uses the asset-liability method to record deferred income taxes. Dexter reports depreciation expense for certain machinery purchased this year using the modified accelerated cost recovery system (MACRS) for income tax purposes and the straight-line basis for financial reporting purposes. The tax deduction is the larger amount this year. Dexter received rent revenues in advance this year. These revenues are included in this year鈥檚 taxable income. However, for financial reporting purposes, these revenues are reported as unearned revenues, a current liability. Instructions (b) How would Dexter account for the temporary differences?

Short Answer

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Rent is the type of expenditure incurred by the organization for the land or machinery used to produce goods and servicesto its owner.

Step by step solution

01

Introduction

Every organization faces a difference in the amounts as per the accounting principles used and the income tax law while estimating the income tax expense. The following procedure can be followed to account for the correct amount of temporary difference.

02

Temporary differences

Dexter can account for the temporary difference by following the procedure as

(1) By identifying the nature and the amount of temporary differences of the current year. If an organization has a depreciating asset, it will affect the amount of temporary difference.

(2) Identifying the amount of the organization's deductibles.

(3) By measuring the amount of deferred tax asset and liability with its respective effective tax rate.

(4) Preparing the valuation account to decrease the amount of deferred tax assets.

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Most popular questions from this chapter

At December 31, 2017, 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, 2017.

This year, Gumowski Company has each of the following items in its income statement. 1. Gross profits on installment sales. 2. Revenues on long-term construction contracts. 3. Estimated costs of product warranty contracts. 4. Premiums on officers鈥� life insurance policies with Gumowski as beneficiary. Instructions (a) Indicate where deferred income taxes are reported in the financial statements.

The book basis of depreciable assets for Erwin Co. is \(900,000, and the tax basis is \)700,000 at the end of 2018. 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 2018.

The pretax financial income of Truttman Company differs from its taxable income throughout each of 4 years as follows. Pretax Taxable Year Financial Income Income Tax Rate 2017 \(290,000 \)180,000 35% 2018 320,000 225,000 40 2019 350,000 260,000 40 2020 420,000 560,000 40

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 2017. 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 2018. (b) Prepare the income statement for 2018, beginning with Income before income taxes.

Pretax financial income for Lake Inc. is \(300,000, and its taxable income is \)100,000 for 2018. 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 2018. No deferred income taxes existed at the beginning of the year.
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