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Chapter 19: Q5CA-1 (page 1052)

Question: At December 31, 2017, Higley Corporation has one temporary difference which will reverse and cause taxable amounts in 2018. In 2017, a new tax act set taxes equal to 45% for 2017, 40% for 2018, and 34% for 2019 and years thereafter.

Instructions

Explain what circumstances would call for Higley to compute its deferred tax liability at the end of 2017 by multiplying the cumulative temporary difference by:

(a) 45%.

(b) 40%.

(c) 34%.

Short Answer

Expert verified
  1. The cumulative temporary difference is multiplied by 45% when the temporary difference gets reversed in 2017
  2. The deferred tax liability is computed by multiplying the temporary difference by 40% when the temporary difference is reversed in 2018
  3. In case, the temporary difference is reversed in 2019, the deferred tax liability is calculated by multiplying the temporary difference by the 34%

Step by step solution

01

Meaning of Income Tax Rates

The income tax rate means the percentage at which the company鈥檚 income shall be taxable. It is a rate specified by the government. It is the percentage of income which is paid to the government

02

The circumstances in which the temporary difference s multiplied by 45% to calculate the deferred tax liability

When the reversal of temporary difference arises in 2017, the deferred tax liability is calculated by multiplying the cumulative difference by 45%

03

The circumstances in which the temporary difference s multiplied by 40% to calculate the deferred tax liability

When the temporary difference is expected to be reversed in 2018, then the deferred tax liability is calculated by multiplying the cumulative difference by 40%.

04

The circumstances in which the temporary difference s multiplied by 34% to calculate the deferred tax liability

When the company expects that the temporary difference arises is reversed and cause taxable in 2019, the deferred tax liability is computed by multiplying the temporary difference by the 34%.

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Most popular questions from this chapter

At the end of 2016, Lucretia McEvil Company has \(180,000 of cumulative temporary differences that will result in reporting the following future taxable amounts. 2017 \) 60,000 2018 50,000 2019 40,000 2020 30,000 \(180,000Tax rates enacted as of the beginning of 2015 are: 2015 and 2016 40% 2017 and 2018 30% 2019 and later 25% McEvil鈥檚 taxable income for 2016 is \)320,000. Taxable income is expected in all future years. Instructions (a) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2016, assuming that there were no deferred taxes at the end of 2015. (b) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2016, assuming that there was a balance of $22,000 in a Deferred Tax Liability account at the end of 2015.

The following information has been obtained for Gocker Corporation.

1. Prior to 2017, taxable income and pretax financial income were identical.

2. Pretax financial income is \(1,700,000 in 2017 and \)1,400,000 in 2018.

3. On January 1, 2017, equipment costing \(1,200,000 is purchased. It is to be depreciated on a straight-line basis over 5 years for tax purposes and over 8 years for financial reporting purposes. (Hint: Use the half-year convention for tax purposes, as discussed in Appendix 11A.)

4. Interest of \)60,000 was earned on tax-exempt municipal obligations in 2018.

5. Included in 2018 pretax financial income is a gain on discontinued operations of $200,000, which is fully taxable.

6. The tax rate is 35% for all periods.

7. Taxable income is expected in all future years.

Instructions (a) Compute taxable income and income taxes payable for 2018. (b) Prepare the journal entry to record 2018 income tax expense, income taxes payable, and deferred taxes. (c) Prepare the bottom portion of Gocker鈥檚 2018 income statement, beginning with 鈥淚ncome from continuing operations before income taxes.鈥� (d) Indicate how deferred income taxes should be presented on the December 31, 2018, balance sheet.

Lincoln Company has the following four deferred tax items at December 31, 2017. The deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same tax authority.

Temporary difference

Deferred tax asset

Deferred tax liability

Rent collected in advance: recognized when a performance obligation is satisfied for accounting purposes and when received for tax purposes.

\(652,000

Use of straight-line depreciation for accounting purposes and accelerated depreciation for tax purposes.

\)330,000

Recognition of income on installment sales at the time of sale for accounting purposes and during period of collection for tax purposes.

\(64,000

Warranty liabilities: recognized for accounting purposes at time of sale for tax purposes at time paid.

\)37,000

On Lincoln鈥檚 December 31, 2017, statement of financial position, it will report:

  1. \(394,000 non-current deferred tax liability and \)689,000 non-current deferred tax asset.
  2. \(330,000 non-current liability and \)625,000 current deferred tax asset.
  3. \(295,000 non-current deferred tax asset.
  4. \)295,000 current tax receivable.

At December 31, 2017, Hillyard Corporation has a deferred tax asset of \(200,000. After a careful review of all available evidence, it is determined that it is more likely than not that \)60,000 of this deferred tax asset will not be realized. Prepare the necessary journal entry.

How are deferred tax assets and deferred tax liabilities reported on the balance sheet?
See all solutions

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