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Chapter 19: Q10E. (page 1097)

The following facts relate to Duncan Corporation. 1. Deferred tax liability, January 1, 2017, \(60,000. 2. Deferred tax asset, January 1, 2017, \)20,000. 3. Taxable income for 2017, \(105,000. 4. Cumulative temporary difference at December 31, 2017, giving rise to future taxable amounts, \)230,000. 5. Cumulative temporary difference at December 31, 2017, giving rise to future deductible amounts, $95,000. 6. Tax rate for all years, 40%. No permanent differences exist. 7. The company is expected to operate profitably in the future. Instructions (a) Compute the amount of pretax financial income for 2017. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017. (c) Prepare the income tax expense section of the income statement for 2017, beginning with the line 鈥淚ncome before income taxes.鈥� (d) Compute the effective tax rate for 2017.

Short Answer

Expert verified

Deductibles are the amount that an organization can claim while filing their income tax return. It helps the organization in decreasing its total income tax expense.

Step by step solution

01

Computation of originating difference

Particulars

Amount

Cumulative temporary difference at the end

$230,000

Less: Cumulative temporary difference at the beginning ($60,00040%)

$150,000

Originating difference in 2017 (taxable)

$80,000

Particulars

Amount

Cumulative temporary difference at the end

$95,000

Less: Cumulative temporary difference at the beginning ($20,00040%)

$50,000

Originating difference in 2017 (deductible)

$45,000

02

(a) Computation of financial income for 2017.

Particulars

Amount

Originating difference in 2017 (taxable)

$80,000

Less: Originating difference in 2017 (deductible)

$45,000

Add: Taxable income for 2017

$105,000

Pretax financial income for 2017

$140,000

03

(b) Preparation of the journal entry

Date

Particulars

Debit

Credit

2017

Income tax expense ($105,000脳40%)

$42,000

Income tax payable

$42,000

(To record the income tax expense)

2017

Deferred tax asset

$20,000

Profit and loss

$20,000

(To record the deferred tax asset)

2017

Profit and loss

$60,000

Deferred tax liability

$60,000

(To record the deferred tax liability)

04

(c) Preparation of the income statement

Income Statement

Particulars

Amount

Income before income taxes

$140,000

Less: Income tax expense

Current expense

$42,000

Deferred expense

$14,000

$56,000

Net Income

$84,000

05

(d) Computation of effective tax rate

Effectivetaxrate=(IncomtaxexpenseIncomebeforeincometax)=($56,000$140,000)=40%

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Most popular questions from this chapter

(Deferred Taxes, Income Effects) Stephanie Delaney, CPA, is the newly hired director of corporate taxation for Acme Incorporated, which is a publicly traded corporation. Ms. Delaney鈥檚 first job with Acme was the review of the company鈥檚 accounting practices on deferred income taxes. In doing her review, she noted differences between tax and book depreciation methods that permitted Acme to realize a sizable deferred tax liability on its balance sheet. As a result, Acme paid very little in income taxes at that time.

Delaney also discovered that Acme has an explicit policy of selling off plant assets before they reversed in the deferred tax liability account. This policy, coupled with the rapid expansion of its plant asset base, allowed Acme to 鈥渄efer鈥� all income taxes payable for several years, even though it always has reported positive earnings and an increasing EPS. Delaney checked with the legal department and found the policy to be legal, but she鈥檚 uncomfortable with the ethics of it.

Instructions

Answer the following questions.

  1. Why would Acme have an explicit policy of selling plant assets before the temporary differences reversed in the deferred tax liability account?
  2. What are the ethical implications of Acme鈥檚 鈥渄eferral鈥� of income taxes?
  3. Who could be harmed by Acme鈥檚 ability to 鈥渄efer鈥� income taxes payable for several years, despite positive earnings?
  4. In a situation such as this, what are Ms. Delaney鈥檚 professional responsibilities as a CPA?

Lee Company鈥檚 current income taxes payable related to its taxable income for 2017 is \(320,000. In addition, Lee鈥檚 deferred tax liability increased \)40,000 and its deferred tax asset increased $10,000 during 2017. What is Lee鈥檚 income tax expense for 2017?

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.

What are the two objectives of accounting for income taxes?

Jennings Inc. reported the following pretax income (loss) and related tax rates during the years 2013鈥�2019. Pretax Income (loss) Tax Rate 2013 $ 40,000 30% 2014 25,000 30% 2015 50,000 30% 2016 80,000 40% 2017 (180,000) 45% 2018 70,000 40% 2019 100,000 35% Pretax financial income (loss) and taxable income (loss) were the same for all years since Jennings began business. The tax rates from 2016鈥�2019 were enacted in 2016.

Instructions (a) Prepare the journal entries for the years 2017鈥�2019 to record income taxes payable (refundable), income tax expense (benefit), and the tax effects of the loss carryback and carryforward. Assume that Jennings elects the carryback provision where possible and expects to realize the benefits of any loss carryforward in the year that immediately follows the loss year. (b) Indicate the effect the 2017 entry(ies) has on the December 31, 2017, balance sheet. (c) Prepare the portion of the income statement starting with 鈥淥perating loss before income taxes,鈥� for 2017. (d) Prepare the portion of the income statement starting with 鈥淚ncome before income taxes鈥� for 2018.
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