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Chapter 19: Q2CE (page 1109)

Question: What are the two basic requirements applied to the measurement of current and deferred income taxes at the date of the financial statements?

Short Answer

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Answer

  1. To identify the amount of tax payable or refundablein the current year
  2. To identify thedeferred tax asset or liability created due to timing differences at the date of the financial statements.

Step by step solution

01

Meaning of Financial Statements

Financial statement means the the written record of the company鈥檚 historical financial information. It shows the financial position and the performance of the company.

02

The two basic requirements are

1. The current and deferred income tax should be measured at the financial statement date to identify whether the company is required to pay the income tax in the current year or the company is receiving a refund from the government.

2. It is measured to know whether the timing difference arises due to the taxable income and accounting income difference. And if it arises, whether it is a deferred tax asset or a liability.

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Most popular questions from this chapter

The differences between the book basis and tax basis of the assets and liabilities of Castle Corporation at the end of 2016 are presented below. Book Basis Tax Basis Accounts receivable \(50,000 \)鈥�0鈥� Litigation liability 30,000 鈥�0鈥� It is estimated that the litigation liability will be settled in 2017. The difference in accounts receivable will result in taxable amounts of \(30,000 in 2017 and \)20,000 in 2018. The company has taxable income of $350,000 in 2016 and is expected to have taxable income in each of the following 2 years. Its enacted tax rate is 34% for all years. This is the company鈥檚 first year of operations. The operating cycle of the business is 2 years. 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.

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.

Differentiate between an originating temporary difference and a reversing difference.

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 $

This year, Gumowski Company has each of the following items in its income statement. 1. Gross profits on installment sales. 2. Revenues on long-term construction contracts. 3. Estimated costs of product warranty contracts. 4. Premiums on officers鈥� life insurance policies with Gumowski as beneficiary. Instructions (a) Indicate where deferred income taxes are reported in the financial statements.
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