Chapter 19: 4Q (page 1092)
Differentiate between an originating temporary difference and a reversing difference.
Income tax is a term used when the government of a country imposes a tax on the total income earned by an individual or a firm so that it can benefit the whole economy.
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The pretax financial income (or loss) figures for Jenny Spangler Company are as follows:
2012- $160,000
2013- 250,000
2014- 80,000
2015- 160,000
2016- 380,000
2017- 120,000
2018- 100,000
Pretax financial income (or loss) and taxable income (loss) were the same for all the given years. Assume a 45% tax rate for 2012 and 2013, and a 40% tax rate for the remaining years. Instructions (a) Prepare the journal entries for the years 2014 to 2018 to record the income tax expense and effects of the net operating loss carrybacks and carryforwards assuming Jenny Spangler Company using the carryback provision. All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.)
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’s December 31, 2017, statement of financial position, it will report:
At December 31, 2017, Cascade Company had a net deferred tax liability of \(450,000. An explanation of the items that compose this balance is as follows.
Temporary Differences in Deferred Taxes | Resulting Balances |
1. Excess of tax depreciation over book depreciation. | \)200,000 |
2. Accrual, for book purposes, of estimated loss contingency from pending lawsuit that is expected to be settled in 2018. The loss will be deducted on the tax return when paid. | \( (50,000) |
3. Accrual method used for book purposes and installment method used for tax purposes for an isolated installment sale of an investment. | \)300,000 |
In analyzing the temporary differences, you find that \(30,000 of the depreciation temporary difference will reverse in 2018, and \)120,000 of the temporary difference due to the installment sale will reverse in 2018. The tax rate for all years is 40%.
Instructions
Indicate the manner in which deferred taxes should be presented on Cascade Company’s December 31, 2017, statement of financial position.
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.”
How are deferred tax assets and deferred tax liabilities reported on the statement of financial position under IFRS?
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