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Chapter 19: 4CA_a (page 1106)

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’ life insurance policies with Gumowski as beneficiary. Instructions (a) Indicate where deferred income taxes are reported in the financial statements.

Short Answer

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Insurance policies are plans that secure the individual from suffering any contingency. Some of the policies are life insurance, fire insurance, marine insurance, etc.

Step by step solution

01

(1) Gross profits on installment sales

It will be recognized as deferred tax income when the amount of gross profits on installment sales are added to the pretax financial income during the current year and included in the taxable amount.

02

(2) Revenues on long-term construction contracts

The organization will recognize it as deferred income taxes whenever it recognizes the revenue from the long-term construction contract.

03

(3) Estimated costs of product warranty contracts

As per the financial reporting purpose, the warranty cost (estimated) will be recognized upon sale, and the money has been paid. Only then will it be recognized as the deferred tax income.

04

(4) Premiums on officers’ life insurance policies with Gumowski as beneficiary

It will be recognized as a permanent difference since it will be used as income-tax deductible while calculating the firm's taxable income.

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Most popular questions from this chapter

Andy McDowell Co. establishes a \(100 million liability at the end of 2017 for the estimated site-cleanup costs at two of its manufacturing facilities. All related closing costs will be paid and deducted on the tax return in 2018. Also, at the end of 2017, the company has \)50 million of temporary differences due to excess depreciation for tax purposes, \(7 million of which will reverse in 2018. The enacted tax rate for all years is 40%, and the company pays taxes of \)64 million on \(160 million of taxable income in 2017. McDowell expects to have taxable income in 2018. Instructions (a) Determine the deferred taxes to be reported at the end of 2017. (b) Indicate how the deferred taxes computed in (a) are to be reported on the balance sheet. (c) Assuming that the only deferred tax account at the beginning of 2017 was a deferred tax liability of \)10,000,000, draft the income tax expense portion of the income statement for 2017, beginning with the line “Income before income taxes.” (Hint: You must first compute (1) the amount of temporary difference underlying the beginning $10,000,000 deferred tax liability, then (2) the amount of temporary differences originating or reversing during the year, and then (3) the amount of pretax financial income.)

Using the information from BE19-2, assume this is the only difference between Oxford’s pretax financial income and taxable income. Prepare the journal entry to record the income tax expense, deferred income taxes, and income taxes payable, and show how the deferred tax liability will be classified on the December 31, 2017, balance sheet.

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