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Chapter 19: Q2CE (page 1109)

Question: What are the two basic requirements applied to the measurement of current and deferred income taxes at the date of the financial statements?

Short Answer

Expert verified

Answer

  1. To identify the amount of tax payable or refundablein the current year
  2. To identify thedeferred tax asset or liability created due to timing differences at the date of the financial statements.

Step by step solution

01

Meaning of Financial Statements

Financial statement means the the written record of the company’s historical financial information. It shows the financial position and the performance of the company.

02

The two basic requirements are

1. The current and deferred income tax should be measured at the financial statement date to identify whether the company is required to pay the income tax in the current year or the company is receiving a refund from the government.

2. It is measured to know whether the timing difference arises due to the taxable income and accounting income difference. And if it arises, whether it is a deferred tax asset or a liability.

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Most popular questions from this chapter

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.”

Pretax financial income for Lake Inc. is \(300,000, and its taxable income is \)100,000 for 2018. Its only temporary difference at the end of the period relates to a $70,000 difference due to excess depreciation for tax purposes. If the tax rate is 40% for all periods, compute the amount of income tax expense to report in 2018. No deferred income taxes existed at the beginning of the year.

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.

What are the possible treatments for tax purposes of a net operating loss? What are the circumstances that determine the option to be applied? What is the proper treatment of a net operating loss for financial reporting purposes?

The amount of income taxes due to the government for a period of time is rarely the amount reported on the income statement for that period as income tax expense. Instructions (a) Explain the objectives of accounting for income taxes in general-purpose financial statements.
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