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Chapter 19: Q23E. (page 1101)

SpamelaHamderson Inc. reports the following pretax income (loss) for both financial reporting purposes and tax purposes. (Assume the carryback provision is used for a net operating loss.) Income (Loss) Tax Rate 2009 \( 29,000 30% 2010 40,000 30 2011 17,000 35 2012 48,000 50 2013 (150,000) 40 2014 90,000 40 2015 30,000 40 2016 105,000 40 2017 (60,000) 45 Year Pretax Income (Loss) Tax Rate 2015 \)120,000 34% 2016 90,000 34 2017 (280,000) 38 2018 220,000 38 The tax rates listed were all enacted by the beginning of 2015. Instructions (a) Prepare the journal entries for the years 2015鈥�2018 to record income tax expense (benefit) and income taxes payable (refundable) and the tax effects of the loss carryback and carryforward, assuming that at the end of 2017 the benefits of the loss carryforward are judged more likely than not to be realized in the future. (b) Using the assumption in (a), prepare the income tax section of the 2017 income statement beginning with the line 鈥淥perating loss before income taxes.鈥� (c) Prepare the journal entries for 2017 and 2018, assuming that based on the weight of available evidence, it is more likely than not that one-fourth of the benefits of the loss carryforward will not be realized. (d) Using the assumption in (c), prepare the income tax section of the 2017 income statement beginning with the line 鈥淥perating loss before income taxes.鈥�

Short Answer

Expert verified

Provision for loss is the type of monetary provision maintained by the organization to meet theuncertain loss condition faced by the company in the future. It is made to protect the firm against the occurrence of liability.

Step by step solution

01

(a) Recording of the transaction in the journal book

Date

Particulars

Debit

Credit

2015

Income tax expense ($120,000脳34%)

$40,800

Income tax payable

$40,800

(To record the tax)

2017

Income tax refund receivables

[$120,000脳34%+$90,000脳34%]

$71,400

Deferred tax asset

[$280,000-$120,000-$90,000脳38%]

$26,600

Benefit due to loss carryback

$71,400

Benefit due to loss carryforward

$26,600

(To record the loss carryback and carryforward)

2018

Income tax expense

$83,600

Income tax payable

($220,000-$70,000脳38%)

$57,000

Deferred tax asset

$26,600

(To record the deferred tax asset)

02

(b) Income statement

Income Statement

Particulars

Amount

Operating loss before income taxes

($280,000)

Add: Income tax benefit

Carryback

$71,400

Carryforward

$26,600

Net Loss

($182,000)

03

(c) Journal entry

Date

Particulars

Debit

Credit

2016

Income tax refund receivables

[$120,000脳34%+$90,000脳34%]

$71,400

Deferred tax asset

[$280,000-$120,000-$90,000脳38%]

$26,600

Benefit due to loss carryback

$71,400

Benefit due to loss carryforward

$26,600

(To record the loss carryback and carryforward)

2016

Benefit due to loss carryforward

$6,650

Allowance to reduce deferred tax asset

($26,600脳25%)

$6,650

(To record the allowance)

2017

Income tax expense

$83,600

Income tax payable

($220,000-$70,000脳38%)

$57,000

Deferred tax asset

$26,600

(To record the deferred tax asset)

2017

Benefit due to loss carryforward

$6,650

Allowance to reduce deferred tax asset ($26,600脳25%)

$6,650

(To record the allowance)

04

(d) Preparation of the statement

Income Statement

Particulars

Amount

Income before income taxes

4220,000

Add: Income tax expense

Current

$57,000

Deferred

$26,600

Benefit loss

($6,650)

Net Profit

$143,050

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Most popular questions from this chapter

Felicia Rashad Corporation has pretax financial income (or loss) equal to taxable income (or loss) from 2009 through 2017 as follows.Income (Loss) Tax Rate 2009 $ 29,000 30% 2010 40,000 30 2011 17,000 35 2012 48,000 50 2013 (150,000) 40 2014 90,000 40 2015 30,000 40 2016 105,000 40 2017 (60,000) 45Pretax financial income (loss) and taxable income (loss) were the same for all years since Rashad has been in business. Assume the carryback provision is employed for net operating losses. In recording the benefits of a loss carryforward, assume that it is more likely than not that the related benefits will be realized. Instructions (a) What entry(ies) for income taxes should be recorded for 2013? (b) Indicate what the income tax expense portion of the income statement for 2013 should look like. Assume all income (loss) relates to continuing operations. (c) What entry for income taxes should be recorded in 2014? (d) How should the income tax expense section of the income statement for 2014 appear? (e) What entry for income taxes should be recorded in 2017? (f) How should the income tax expense section of the income statement for 2017 appear?

(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?

The accounting records of Shinault Inc. show the following data for 2017 (its first year of operations).

1. Life insurance expense on officers was \(9,000.

2. Equipment was acquired in early January for \)300,000. Straight-line depreciation over a 5-year life is used with no salvage value. For tax purposes, Shinault used a 30% rate to calculate depreciation.

3. Interest revenue on State of New York bonds totaled \(4,000.

4. Product warranties were estimated to be \)50,000 in 2017. Actual repair and labor costs related to the warranties in 2017 were \(10,000. The remainder is estimated to be paid evenly in 2018 and 2019.

5. Gross profit on an accrual basis was \)100,000. For tax purposes, \(75,000 was recorded on the installment-sales method.

6. Fines incurred for pollution violations were \)4,200.

7. Pretax financial income was $750,000. The tax rate is 30%.

Instructions (a) Prepare a schedule starting with pretax financial income in 2017 and ending with taxable income in 2017. (b) Prepare the journal entry for 2017 to record income taxes payable, income tax expense, and deferred income taxes.

Callaway Corp. has a deferred tax asset account with a balance of \(150,000 at the end of 2017 due to a single cumulative temporary difference of \)375,000. At the end of 2018, this same temporary difference has increased to a cumulative amount of \(500,000. Taxable income for 2018 is \)850,000. The tax rate is 40% for all years.

Instructions

(a)Record income tax expense, deferred income taxes, and income taxes payable for 2018, assuming that it is probable that the deferred tax asset will be realized.

(b) Assuming that it is probable that $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2018 to recognize this probability.

What are the two objectives of accounting for income taxes?
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