Post on 06-Apr-2018
8/3/2019 Defd Tax in-class Problems to Print
1/14
1
Deferred Tax Examples
Nice to have on paper as we work
problems during class
ACCT 414
8/3/2019 Defd Tax in-class Problems to Print
2/14
2
Illustration Assume the company reports revenue in
2007, 2008, and 2009 of $130,000, respectively.
The revenue is reported the same for both GAAP and
tax purposes. For simplification, assume the companyreports one expense, depreciation, over the three
years applying the straight-line method for financial
reporting purposes (GAAP) and MACRS (IRS) for the
tax return. What is the effect on the accounts ofusing the two different depreciation methods?
LO 1 Identifydifferences between pretaxfinancialincomeandtaxableincome.
Fundamentals of Accounting for Income Taxes
8/3/2019 Defd Tax in-class Problems to Print
3/14
3
Revenues
Expenses (S/L depreciation)
Pretax financial income
Income tax expense (40%)
$130,000
30,000
$100,000
$40,000
$130,000
2008
30,000
$100,000
$40,000
$130,000
2009
30,000
$100,000
$40,000
$390,000
Total
90,000
$300,000
$120,000
GAAP ReportingGAAP Reporting
RevenuesExpenses (MACRS depreciation)
Pretax financial income
Income tax payable (40%)
$130,000
2007
40,000
$90,000
$36,000
$130,000
2008
30,000
$100,000
$40,000
$130,000
2009
20,000
$110,000
$44,000
$390,000
Total
90,000
$300,000
$120,000
Tax Reporting
2007
LO 1 Identifydifferences between pretaxfinancialincomeandtaxableincome.
Book vs. Tax Difference
8/3/2019 Defd Tax in-class Problems to Print
4/14
4
Example Deferred Tax Liability
Assume that Sales Company recognizes $15,000 gross profit from installmentsales for financial accounting in 2006. The gross profit will be taxable at $3,000each year for the next five years. The company earns $10,000 additional incomeeach year and the tax rate is 40%. The following schedule shows taxable income,income tax payable, financial income, and income tax expense for the five year
period.
8/3/2019 Defd Tax in-class Problems to Print
5/14
5
Example Deferred Tax Asset
Financial Magazine Company received $15,000 ofsubscriptions in advance for2006. Subscription revenuewill be recognized equally in 2007,2008, and 2009, forfinancial accounting purposes but all of the $15,000 will be
recognized in 2006 for tax purposes. There is additionalincome of $50,000 each year and the tax rate is 40%.
8/3/2019 Defd Tax in-class Problems to Print
6/14
6
E19-1 South Carolina Corporation has one temporarydifference at the end of 2007 that will reverse and causetaxable amounts of $55,000 in 2008, $60,000 in 2009, and$65,000 in 2010. South Carolinas pretax financial incomefor 2007 is $300,000, and the tax rate is 30% for all years.There are no deferred taxes at the beginning of 2007.
Instructions
a) Compute taxable income and income taxes payable for 2007.b) Prepare the journal entry to record income tax expense,
deferred income taxes, and income taxes payable for 2007.
South Carolina Corporation
8/3/2019 Defd Tax in-class Problems to Print
7/14
7
Columbia Corporation has one temporary differenceat the end of 2007 that will reverse and causedeductible amounts of $50,000 in 2008, $65,000 in2009, and $40,000 in 2010. Columbias pretax
financial income for 2007 is $200,000 and the taxrate is 34% for all years. There are no deferredtaxes at the beginning of 2007. Columbia expectsto be profitable in the future.
Instructions
a) Compute taxable income and income taxes payable for 2007.
b) Prepare the journal entry to record income tax expense,deferred income taxes, and income taxes payable for 2007.
Columbia Corporation
8/3/2019 Defd Tax in-class Problems to Print
8/14
8
Zoop Inc. incurred a net operating loss of$500,000 in 2007. Taxable income was$200,000 for 2005 and $200,000 for 2006.
The tax rate for all years is 40%. Zoop electsthe carryback option. Prepare the journalentries to record the benefits of the loss
carryback and the loss carryforward.
Zoop Inc. (NOL)
8/3/2019 Defd Tax in-class Problems to Print
9/14
9
Now assume that it is more likely than notthat the entire net operating losscarryforward will not be realized by ZoopInc. in future years. Prepare all thejournal entries necessary at the end of2007.
Zoop Inc. (Variation)
8/3/2019 Defd Tax in-class Problems to Print
10/14
10
Valis Corporation had the following tax information.
Valis Corporation (NOL)
Taxable Tax Taxes
Year Income Rate Paid
2004 300,000$ 35% 105,000$
2005 325,000 30% 97,5002006 400,000 30% 120,000
In 2007 Valis suffered a net operating loss of
$450,000, which it elected to carry back. The2007 enacted tax rate is 29%. Prepare Valiss entry
to record the effect of the loss carryback.
8/3/2019 Defd Tax in-class Problems to Print
11/14
11
At the end of2002, the corporate tax rate ischanged from 40% to 35%. The new rate iseffective January 1,2004.
The deferred tax account (1/1/2002) is asfollows:
Excess tax depreciation: $3 million
Deferred tax liability: $1.2 million
Related taxable amounts are expected to occurequally over2003,2004, and 2005.
Provide the journal entry to reflect the change.
Example:
Revision ofF
uture Tax Rate
Example:
Revision ofF
uture Tax Rate
8/3/2019 Defd Tax in-class Problems to Print
12/14
12
8/3/2019 Defd Tax in-class Problems to Print
13/14
13
Zurich Companyreports pretaxfinancialincomeof $70,000for2007.Thefollowingitemscausetaxableincometo bedifferentthan pretaxfinancialincome. (1) Depreciationonthetaxreturnisgreaterthandepreciationontheincomestatement by$16,000. (2) Rentcollectedonthetaxreturnisgreaterthan
rentearnedontheincomestatement by $22,000. (3) Finesforpollutionappearasanexpenseof $11,000ontheincomestatement.
Zurichstaxrateis 30%forallyears,andthecompanyexpects
toreporttaxableincomeinallfutureyears.Therearenodeferredtaxesatthe beginningof2007.
Instructions Preparethe journalentrytorecordincometaxexpense,deferredincometaxes,andincometaxes payablefor2007.
Review Problem
8/3/2019 Defd Tax in-class Problems to Print
14/14
14