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Chapter 19: Q24E. (page 1101)

Beilman Inc. reports the following pretax income (loss) for both book and tax purposes. (Assume the carryback provision is used where possible for a net operating loss.) Year Pretax Income (Loss) Tax Rate 2015 $120,000 40% 2016 90,000 40 2017 (280,000) 45 2018 120,000 45 The tax rates listed were all enacted by the beginning of 2015.Instructions (a) Prepare the journal entries for years 2015鈥�2018 to record income tax expense (benefit) and income taxes payable (refundable), and the tax effects of the loss carryback and loss carryforward, assuming that based on the weight of available evidence, it is more likely than not that one-half of the benefits of the loss carryforward will not be realized. (b) 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 income tax section of the 2018 income statement beginning with the line 鈥淚ncome before income taxes.鈥�

Short Answer

Expert verified

Income before income taxes is the first head under an organization's financial statement of income. It includes the amount a business earns before deducting the amount of tax expense.

Step by step solution

01

(a) Journal entry

Date

Particulars

Debit

Credit

2015

Income tax expense ($120,000脳40%)

$48,000

Income tax payable

$48,000

(To record the income tax)

2016

Income tax expense ($90,000脳40%)

$36,000

Income tax payable

$36,000

(To record the income tax)

2017

Income tax refund receivables

($48,000+$36,000)

$84,000

Benefit due to loss carryback

$84,000

(To record the loss carryback)

2017

Deferred tax asset

[$280,000-$120,000-$90,000脳45%]

$31,500

Benefit due to loss carryforward

$31,500

(To record the loss carryforward)

2017

Benefit due to loss carryforward

($70,000脳45%脳50%)

$15,750

Allowance to reduce the deferred tax asset to expected realizable value

$15,750

(To record the loss carryforward)

2018

Income tax expense

$54,000

Income tax payable

($120,000-$70,000脳45%)

$22,500

Deferred tax asset

$31,500

(To record the tax)

2018

Allowance to reduce deferred tax asset

$15,750

Benefit due to loss carryforward

$15,750

(To record the allowance)

02

(b) Income statement

Income statement for 2017

Particulars

Amount

Operating loss before income taxes

($280,000)

Add: Income tax benefit

Benefit due to loss carryback

$84,000

Benefit duet to loss carryforward

$31,500

Net Loss

($164,500)

03

(c) Preparation of the income tax section

Income statement for 2018

Particulars

Amount

Income before income tax

$120,000

Less: Income tax expense

Current tax

$22,500

Deferred tax

$31,500

Benefit due to loss carryforward

($15,750)

Net Profit

$81,750

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Most popular questions from this chapter

Explain the difference between pretax financial income and taxable income.

(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?

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.

Bandung Corporation began 2017 with a \(92,000 balance in the Deferred Tax Liability account. At the end of 2017, the related cumulative temporary difference amounts to \)350,000, and it will reverse evenly over the next 2 years. Pretax accounting income for 2017 is \(525,000, the tax rate for all years is 40%, and taxable income for 2017 is \)405,000. Instructions (a) Compute income taxes payable 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�

Teri Hatcher Inc., in its first year of operations, has the following differences between the book basis and tax basis of its assets and liabilities at the end of 2016. Book Basis Tax Basis Equipment (net) \(400,000 \)340,000 Estimated warranty liability \(200,000 \) 鈥�0鈥� It is estimated that the warranty liability will be settled in 2017. The difference in equipment (net) will result in taxable amounts of \(20,000 in 2017, \)30,000 in 2018, and \(10,000 in 2019. The company has taxable income of \)520,000 in 2016. As of the beginning of 2016, the enacted tax rate is 34% for 2016鈥�2018, and 30% for 2019. Hatcher expects to report taxable income through 2019.Instructions (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016. (b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2016.
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