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Chapter 19: Q4ISTQ (page 1113)

Stephens Company has a deductible temporary difference of \(2,000,000 at the end of its first year of operations. Its tax rate is 40 percent. Stephens has \)1,800,000 of income taxes payable. After a careful review of all available evidence, Stephens determines that it is probable that it will not realize \(200,000 of this deferred tax asset. On Stephens Company鈥檚 statement of financial position at the end of its first year of operations, what is the amount of deferred tax asset?

(a) \)2,000,000. (c) \(800,000.

(b) \)1,800,000. (d) $600,000.

Short Answer

Expert verified

The business entity will report deferred tax assets of$600,000.

Step by step solution

01

Definition of Deferred Tax Asset

The line item reported on the balance sheet of the business entity that contributes towards the reduction of the tax liability is known as deferred tax asset. Such asset is reported because of the difference between the accounting rules and the tax rules.

02

Explanation for the correct option

The correct option is (d) $600,000.

Working note:

Particular($2,000,000脳40%)

Amount $

Gross deferred tax asset

$800,000

Less: Unrealized deferred tax asset

(200,000)

Deferred tax asset

$600,000

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Most popular questions from this chapter

What controversy relates to the accounting for net operating loss carryforwards?

Homestake Mining Company is a 120-year-old international gold mining company with substantial gold mining operations and exploration in the United States, Canada, and Australia. At year-end, Homestake reported the following items related to income taxes (thousands of dollars).

Total current taxes

\( 26,349

Total deferred taxes

(39,436)

Total income and mining taxes (the provision for taxes per its income statement)

\) (13,087)

Deferred tax liabilities

\(303,050

Deferred tax assets, net of valuation allowance of \)207,175

95,275

\(207,775


Note 6: The classification of deferred tax assets and liabilities is based on the related asset or liability creating the deferred tax. Deferred taxes not related to a specific asset or liability are classified based on the estimated period of reversal.

Tax loss carry forwards (U.S., Canada, Australia, and Chile)

\)71,151

Tax credit carry forwards

\(12,007

Instructions

  1. What is the significance of Homestake鈥檚 disclosure of 鈥淐urrent taxes鈥� of \)26,349 and 鈥淒eferred taxes鈥� of \((39,436)?
  2. Explain the concept behind Homestake鈥檚 disclosure of gross deferred tax liabilities (future taxable amounts) and gross deferred tax assets (future deductible amounts).
  3. Homestake reported tax loss carry forwards of \)71,151 and tax credit carry forwards of $12,007. How do the carry back and carry forward provisions affect the reporting of deferred tax assets and deferred tax liabilities?

Youngman Corporation has temporary differences at December 31, 2017, that result in the following deferred taxes. Deferred tax liability related to depreciation difference $38,000 Deferred tax asset related to warranty liability 62,000 Deferred tax liability related to revenue recognition 96,000 Deferred tax asset related to litigation accruals 27,000 Indicate how these balances would be presented in Youngman鈥檚 December 31, 2017, balance sheet.

Feagler Company鈥檚 current income taxes payable related to its taxable income for 2017 is \(460,000. In addition, Feagler鈥檚 deferred tax asset decreased \)20,000 during 2017. What is Feagler鈥檚 income tax expense for 2017?

Differentiate between 鈥渓oss carryback鈥� and 鈥渓oss carryforward.鈥� Which can be accounted for with the greater certainty when it arises? Why?
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