Deferred Tax Liability

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16-1 Deferred Tax Liability Chapter 16 Illustrated Solution: Problem 16-28

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Chapter 16. Illustrated Solution: Problem 16-28. Deferred Tax Liability. Timpany Motors, Inc. - PowerPoint PPT Presentation

Transcript of Deferred Tax Liability

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DeferredTax Liability

Chapter 16Illustrated Solution: Problem 16-28Illustrated Solution: Problem 16-28

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Timpany Motors, Inc.Timpany Motors, Inc.

Income and expense recognition rules differ between financial accounting standards (GAAP) and Internal Revenue Code. This typically causes corporations to report one “net income” to stockholders and a different “net income” to the IRS.

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Timpany Motors, Inc.Timpany Motors, Inc.

Income and expense recognition rules differ between financial accounting standards (GAAP) and Internal Revenue Code. This typically causes corporations to report one “net income” to stockholders and a different “net income” to the IRS.

Many of these differences arise from expense or revenue items that will eventually be recognized for both financial reporting and tax purposes. However, financial reporting and tax reporting will recognize these items in different reporting periods which may cause temporary timing differences in reported net income.

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Timpany Motors, Inc.

Part 1 — Income Taxes PayablePart 1 — Income Taxes Payable

Pretax financial income……………………………. $75,000

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Timpany Motors, Inc.

Pretax financial income……………………………. $75,000Nondeductible expenses………………………….. 30,000

Part 1 — Income Taxes PayablePart 1 — Income Taxes Payable

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Timpany Motors, Inc.

Pretax financial income……………………………. $75,000Nondeductible expenses………………………….. 30,000Nontaxable revenues……………………………….

(12,500)

Part 1 — Income Taxes PayablePart 1 — Income Taxes Payable

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Timpany Motors, Inc.

Pretax financial income……………………………. $75,000Nondeductible expenses………………………….. 30,000Nontaxable revenues……………………………….

(12,500)Gross profit on installment sales…………………..

(28,000)

Part 1 — Income Taxes PayablePart 1 — Income Taxes Payable

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Timpany Motors, Inc.

Pretax financial income……………………………. $75,000Nondeductible expenses………………………….. 30,000Nontaxable revenues……………………………….

(12,500)Gross profit on installment sales…………………..

(28,000)Taxable income…………………………………….. $64,500

Part 1 — Income Taxes PayablePart 1 — Income Taxes Payable

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Income Tax Expense—Current…………………… 25,800

Income Taxes Payable………………………… 25,800

($64,500 x .40)

Timpany Motors, Inc.

Part 1 — Journal EntryPart 1 — Journal Entry

Pretax financial income……………………………. $75,000Nondeductible expenses………………………….. 30,000Nontaxable revenues……………………………….

(12,500)Gross profit on installment sales…………………..

(28,000)Taxable income…………………………………….. $64,500

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YearEnacted

Rate

2003 36%

2004 34%

2005 30%

Part 1 — Deferred TaxesPart 1 — Deferred Taxes

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YearEnacted

RateTaxable Amount

2003 36% $ 6,000

2004 34% 13,500

2005 30% 8,500

$28,000

Part 1 — Deferred TaxesPart 1 — Deferred Taxes

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YearEnacted

RateTaxable Amount

Liability Valuation

2003 36% $ 6,000 $2,160

2004 34% 13,500 4,590

2005 30% 8,500 2,550

$28,000 $9,300

Part 1 — Deferred TaxesPart 1 — Deferred Taxes

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YearEnacted

RateTaxable Amount

Liability Valuation

2003 36% $ 6,000 $2,160

2004 34% 13,500 4,590

2005 30% 8,500 2,550

$28,000 $9,300

The receivable from the installment sale would be classified according to the time of its expected collection. (At December 31, 2002, $6,000 would be classified as current and $22,000 as noncurrent.) The classification of the deferred tax liability will mirror this split.

Part 1 — Deferred TaxesPart 1 — Deferred Taxes

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Income Tax Expense—Deferred………………….. 9,300

Deferred Tax Liability—Current………………… 2,160

Deferred Tax Liability—Noncurrent……………. 7,140

Timpany Motors, Inc.

Part 1 — Deferred TaxesPart 1 — Deferred Taxes

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Income from continuing operations before income taxes…………………………………….. $75,000Income taxes on continuing operations:

Current provision………………………………. Deferred provision………………………………

Net income…………………………………………..

Timpany Motors, Inc.Partial Income Statement

For the Year Ended December 31, 2002

Part 2 — Partial Income StatementPart 2 — Partial Income Statement

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Income from continuing operations before income taxes…………………………………….. $75,000Income taxes on continuing operations:

Current provision………………………………. $25,800Deferred provision……………………………… 9,300 35,100

Net income………………………………………….. $39,900

Timpany Motors, Inc.Partial Income Statement

For the Year Ended December 31, 2002

Part 2 — Partial Income StatementPart 2 — Partial Income Statement

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End of ProblemEnd of Problem


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