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Chapter 19: 3CA_a (page 1106)

The asset-liability approach for recording deferred income taxes is an integral part of generally accepted accounting principles.

Instructions (a) Indicate whether each of the following independent situations should be treated as a temporary difference or as a permanent difference, and explain why. (1) Estimated warranty costs (covering a 3-year warranty) are expensed for financial reporting purposes at the time of sale but deducted for income tax purposes when paid. (2) Depreciation for book and income tax purposes differs because of different bases of carrying the related property, which was acquired in a trade-in. The different bases are a result of different rules used for book and tax purposes to compute the basis of property acquired in a trade-in. (3) A company properly uses the equity method to account for its 30% investment in another company. The investee pays dividends that are about 10% of its annual earnings. (4) A company reports a gain on an involuntary conversion of a nonmonetary asset to a monetary asset. The company elects to replace the property within the statutory period using the total proceeds so the gain is not reported on the current year鈥檚 tax return.

Short Answer

Expert verified

Dividends are the type of payment earned by an investor against the shares purchased or money invested in the form of equity shares in an organization. It is paid out of the organization'stotal profits.

Step by step solution

01

(1) Temporary difference

The amount of estimated warranty costs for three years (total) will eventually decrease the organization's pretax financial income. On the other hand, it will also reduce the total taxable income. It is regarded as a future deductible amount and will increase the amount of deferred tax assets.

02

(2) Temporary difference

The variation in the amounts of tax basis and the book basis while computing the income tax expense will decrease the taxable amount because of the depreciation on the value of an asset.

03

(3) Temporary difference and permanent difference

The share of earnings by an investor will be added to the amount of pretax financial income of an organization in which 80% of the amount will be listed under the permanent difference and 10% of the earnings (out of 20% of dividends) will be reported under the temporary difference. It is because of the distributions made by the investor for 10% of the earnings.

04

(4) Temporary difference

As per the rule prescribed by IFRS, if an organization incurs any gain due to an involuntary conversion into the qualitative value of assets, it must be recognized during the conversion period. The difference in the amounts of replacement cost and the carrying value of assets will lead to additional taxable income.

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Most popular questions from this chapter

The asset-liability approach for recording deferred income taxes is an integral part of generally accepted accounting principles. (b) Discuss the nature of the deferred income tax accounts and the manner in which these accounts are to be reported on the balance sheet.

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.

What is an uncertain tax position, and what are the general guidelines for accounting for uncertain tax positions?

Kleckner Company started operations in 2013. Although it has grown steadily, the company reported accumulatedoperating losses of \(450,000 in its first four years in business. In the most recent year (2017), Kleckner appears to haveturned the corner and reported modest taxable income of \)30,000. In addition to a deferred tax asset related to its net operatingloss, Kleckner has recorded a deferred tax asset related to product warranties and a deferred tax liability related to accelerateddepreciation. Given its past operating results, Kleckner has determined that it is not probable that it will realize any of thedeferred tax assets. However, given its improved performance, Kleckner management wonders whether there are any accountingconsequences for its deferred tax assets. They would like you to conduct some research on the accounting for recognitionof its deferred tax asset.

Instructions

Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/).(Click on the IFRS tab and then register for freeeIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser torespond to the following questions. (Provide paragraph citations.)

(a)Briefl y explain to Kleckner management the importance of future taxable income as it relates to the recognition ofdeferred tax assets.

(b)What are the sources of income that may be relied upon in assessing realization of a deferred tax asset?

(c)What are tax-planning strategies? From the information provided, does it appear that Kleckner could employ a taxplanningstrategy in evaluating its deferred tax asset?

Mitchell Corporation had income before income taxes of \(195,000 in 2017. Mitchell鈥檚 current income tax expense is \)48,000, and deferred income tax expense is $30,000. Prepare Mitchell鈥檚 2017 income statement, beginning with Income before income taxes.
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