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Chapter 19: Q11E. (page 1097)

At the end of 2016, Lucretia McEvil Company has \(180,000 of cumulative temporary differences that will result in reporting the following future taxable amounts. 2017 \) 60,000 2018 50,000 2019 40,000 2020 30,000 \(180,000Tax rates enacted as of the beginning of 2015 are: 2015 and 2016 40% 2017 and 2018 30% 2019 and later 25% McEvil鈥檚 taxable income for 2016 is \)320,000. Taxable income is expected in all future years. Instructions (a) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2016, assuming that there were no deferred taxes at the end of 2015. (b) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2016, assuming that there was a balance of $22,000 in a Deferred Tax Liability account at the end of 2015.

Short Answer

Expert verified

A deferred income tax represents the amount that arises due to the difference between the income tax expense due to the organization's accounting techniques and theincome tax laws.

Step by step solution

01

Computation of deferred tax liability

Year

Taxable amounts

Tax Rate

Deferred tax liability

2017

$60,000

30%

$18,000

2018

$50,000

30%

$15,000

2019

$40,000

25%

$10,000

2020

$30,000

25%

$7,500

Total

$180,000

$50,500

02

(a) Journal entry

Date

Particulars

Debit

Credit

2016

Income tax expense

$178,500

Income tax payable

($320,000脳40%)

$128,000

Deferred tax liability

$50,500

(To record the income tax expense)

03

(b) Journal entry

Date

Particulars

Debit

Credit

2015

Income tax expense

$156,500

Income tax payable

($320,000脳40%)

$128,000

Deferred tax liability

($50,500-$22,000)

$28,500

(To record the income tax expense)

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Most popular questions from this chapter

Listed below are items that are commonly accounted for differently for financial reporting purposes than they are for tax purposes. Instructions For each item below, indicate whether it involves: (1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset. (2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability. (3) A permanent difference. Use the appropriate number to indicate your answer for each. (a) ______ The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes for some plant assets. (b) ______ A landlord collects some rents in advance. Rents received are taxable in the period when they are received. (c) ______ Expenses are incurred in obtaining tax-exempt income. (d) ______ Costs of guarantees and warranties are estimated and accrued for financial reporting purposes. (e) ______ Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes. (f) ______ For some assets, straight-line depreciation is used for both financial reporting purposes and tax purposes, but the assets鈥� lives are shorter for tax purposes. (g) ______ Interest is received on an investment in tax-exempt municipal obligations. (h) ______ Proceeds are received from a life insurance company because of the death of a key officer. (The company carries a policy on key officers.) (i) ______ The tax return reports a deduction for 80% of the dividends received from U.S. corporations. The cost method is used in accounting for the related investments for financial reporting purposes. (j) ______ Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled. (k) ______ Expenses on stock options are accrued for financial reporting purposes.

Using the information from BE19-2, assume this is the only difference between Oxford鈥檚 pretax financial income and taxable income. Prepare the journal entry to record the income tax expense, deferred income taxes, and income taxes payable, and show how the deferred tax liability will be classified on the December 31, 2017, balance sheet.

Lincoln Company has the following four deferred tax items at December 31, 2017. The deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same tax authority.

Temporary difference

Deferred tax asset

Deferred tax liability

Rent collected in advance: recognized when a performance obligation is satisfied for accounting purposes and when received for tax purposes.

\(652,000

Use of straight-line depreciation for accounting purposes and accelerated depreciation for tax purposes.

\)330,000

Recognition of income on installment sales at the time of sale for accounting purposes and during period of collection for tax purposes.

\(64,000

Warranty liabilities: recognized for accounting purposes at time of sale for tax purposes at time paid.

\)37,000

On Lincoln鈥檚 December 31, 2017, statement of financial position, it will report:

  1. \(394,000 non-current deferred tax liability and \)689,000 non-current deferred tax asset.
  2. \(330,000 non-current liability and \)625,000 current deferred tax asset.
  3. \(295,000 non-current deferred tax asset.
  4. \)295,000 current tax receivable.

Question: Interest on municipal bonds is referred to as a permanent difference when determining the proper amount to report for deferred taxes. Explain the meaning of permanent differences, and give two other examples.

Instructions Complete the following statements by filling in the blanks. (a) In a period in which a taxable temporary difference reverses, the reversal will cause taxable income to be _______ (less than, greater than) pretax financial income. (b) If a \(76,000 balance in Deferred Tax Asset was computed by use of a 40% rate, the underlying cumulative temporary difference amounts to \)_______. (c) Deferred taxes ________ (are, are not) recorded to account for permanent differences. (d) If a taxable temporary difference originates in 2017, it will cause taxable income for 2017 to be ________ (less than, greater than) pretax financial income for 2017. (e) If total tax expense is \(50,000 and deferred tax expense is \)65,000, then the current portion of the expense computation is referred to as current tax _______ (expense, benefit) of \(_______. (f) If a corporation鈥檚 tax return shows taxable income of \)100,000 for Year 2 and a tax rate of 40%, how much will appear on the December 31, Year 2, balance sheet for 鈥淚ncome taxes payable鈥� if the company has made estimated tax payments of \(36,500 for Year 2? \)________. (g) An increase in the Deferred Tax Liability account on the balance sheet is recorded by a _______ (debit, credit) to the Income Tax Expense account. (h) An income statement that reports current tax expense of \(82,000 and deferred tax benefit of \)23,000 will report total income tax expense of \(________. (i) A valuation account is needed whenever it is judged to be _______ that a portion of a deferred tax asset _______ (will be, will not be) realized. (j) If the tax return shows total taxes due for the period of \)75,000 but the income statement shows total income tax expense of \(55,000, the difference of \)20,000 is referred to as deferred tax _______ (expense, benefit).
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