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Chapter 19: Q14E (page 1098)

Question: Novotna Inc.鈥檚 only temporary difference at the beginning and end of 2016 is caused by a \(3 million deferred gain for tax purposes for an installment sale of a plant asset, and the related receivable (only one-half of which is classified as a current asset) is due in equal installments in 2017 and 2018. The related deferred tax liability at the beginning of the year is \)1,200,000. In the third quarter of 2016, a new tax rate of 34% is enacted into law and is scheduled to become effective for 2018. Taxable income for 2016 is $5,000,000, and taxable income is expected in all future years.

Instructions

(a) Determine the amount reported as a deferred tax liability at the end of 2016. Indicate proper classification(s).

(b) Prepare the journal entry (if any) necessary to adjust the deferred tax liability when the new tax rate is enacted into law.

(c) Draft the income tax expense portion of the income statement for 2016. Begin with the line 鈥淚ncome before income taxes.鈥� Assume no permanent differences exist.

Short Answer

Expert verified

Answer:

  1. The amount reported as adeferred tax liability at the end of 2016 is $1,110,000, which is classified as

Current Liability: Deferred tax liability: $600,000

Non-Current liability: Deferred tax liability: $510,000

2.Deferred tax liability is debited and income tax payable is credited by $90,000

3. The net income is $3,090,000

Step by step solution

01

Meaning of Taxable Income

The taxable income means the income which is chargeable to the income tax under the income tax rules.It includes all the taxable income and is reduced by the expenses and deductions.

02

Calculation of deferred tax liability 

2017

2018

Total

Future taxable amounts

$1,500,000

$1,500,000

$3,000,000

Tax rate

40%

34%

Deferred tax liability

$600,000

$510,000

$1,110,000

Working note:

Calculation of prior tax rate of 2017

Incometaxrateof2016=DeferredtaxliabilityTemporarydifference=$1,200,000$3,000,000=40%

The classification of deferred tax liability as current or non-current is based on the time when reversal of temporary difference occurs.

$600,000 is treated as a current liability, and $510,000 is treated as a non-current liability.

03

 Step 3: Journal entry

Date

Particulars

Debit ($)

Credit ($)

Deferred tax liability

90,000

Income tax expense

90,000

04

Showing income statement for 2016

Income statement for 2016

Particulars

Amount ($)

Amount ($)

Income before income tax

$5,000,000

Current income tax expense

$2,000,000

Less: Adjustments due to change in tax rate

$90,000

$1,910,000

Net Income

$3,090,000

Working note:

Calculation of Income tax expense for 2016

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Most popular questions from this chapter

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).

At December 31, 2017, Fell Corporation had a deferred tax liability of \(680,000, resulting from future taxable amounts of \)2,000,000 and an enacted tax rate of 34%. In May 2018, a new income tax act is signed into law that raises the tax rate to 40% for 2018 and future years. Prepare the journal entry for Fell to adjust the deferred tax liability.

Addison Co. has one temporary difference at the beginning of 2017 of \(500,000. The deferred tax liability established for this amount is \)150,000, based on a tax rate of 30%. The temporary difference will provide the following taxable amounts: \(100,000 in 2018, \)200,000 in 2019, and $200,000 in 2020. If a new tax rate for 2020 of 20% is enacted into law at the end of 2017, what is the journal entry necessary in 2017 (if any) to adjust deferred taxes?

Where can authoritative IFRS related to the accounting for taxes be found?

During 2017, Kate Holmes Co.鈥檚 first year of operations, the company reports pretax financial income at \(250,000. Holmes鈥檚 enacted tax rate is 45% for 2017 and 40% for all later years. Holmes expects to have taxable income in each of the next 5 years. The effects on future tax returns of temporary differences existing at December 31, 2017, are summarized as follows. Future Years 2018 2019 2020 2021 2022 Total Future taxable (deductible) amounts: Installment sales \)32,000 \(32,000 \)32,000 \( 96,000 Depreciation 6,000 6,000 6,000 \)6,000 \(6,000 30,000 Unearned rent (50,000) (50,000) (100,000) Instructions (a) Complete the schedule below to compute deferred taxes at December 31, 2017. (b) Compute taxable income for 2017. (c) Prepare the journal entry to record income taxes payable, deferred taxes, and income tax expense for 2017. Future Taxable December 31, 2017 (Deductible) Tax Deferred Tax Temporary Difference Amounts Rate (Asset) Liability Installment sales \) 96,000 Depreciation 30,000 Unearned rent (100,000) Totals $
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