Chapter 19: 1Q (page 1092)
Explain the difference between pretax financial income and taxable income.
Income is a term used when an organization earns money for the products and services offered to sell in the potential market to its customers. Without a regular income, an organization cannot survive in the market.
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Presented below are two independent situations related to future taxable and deductible amounts resulting from temporary differences existing at December 31, 2017. 1. Mooney Co. has developed the following schedule of future taxable and deductible amounts. 2018 2019 2020 2021 2022 Taxable amounts \(300 \)300 \(300 \) 300 \(300 Deductible amount — — — (1,600) — 2. Roesch Co. has the following schedule of future taxable and deductible amounts. 2018 2019 2020 2021 Taxable amounts \)300 \(300 \) 300 \(300 Deductible amount — — (2,300) — Both Mooney Co. and Roesch Co. have taxable income of \)4,000 in 2017 and expect to have taxable income in all future years. The tax rates enacted as of the beginning of 2017 are 30% for 2017–2020 and 35% for years thereafter. All of the underlying temporary differences relate to noncurrent assets and liabilities. Instructions For each of these two situations, compute the net amount of deferred income taxes to be reported at the end of 2017, and indicate how it should be classified on the balance sheet.
Meyer reported the following pretax financial income (loss) for the years 2015–2019. 2015 $240,000 2016 350,000 2017 120,000 2018 (570,000) 2019 180,000 Pretax financial income (loss) and taxable income (loss) were the same for all the years involved. The enacted tax rate was 34% for 2015 and 2016, and 40% for 2017–2019. Assume the carryback provision is used for the net operating losses. Instructions (a) Prepare the journal entries for the years 2017–2019 to record the income tax expense, 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-fifth of the benefits of the loss carryforward will not be realized. (b) Prepare the income tax section of the 2018 income statement beginning with the line “Income (loss) before income taxes.”
What is an uncertain tax position, and what are the general guidelines for accounting for uncertain tax positions?
(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’s first job with Acme was the review of the company’s 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 “defer” 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’s uncomfortable with the ethics of it.
Instructions
Answer the following questions.
Under IFRS: (a) “probable” is defined as a level of likelihood of at least slightly more than 60%. (b) a company should reduce a deferred tax asset when it is likely that some or all of it will not be realized by using a valuation allowance. (c) a company considers only positive evidence when determining whether to recognize a deferred tax asset. (d) deferred tax assets must be evaluated at the end of each accounting period.
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