Homework – Week 2 – Chapter 19

Problem 1: California Surplus Inc. qualifies to use the installment-sales method for tax purposes and sold an investment on an installment basis. The total gain of $75000 was reported for financial reporting purposes in the period of sale. The installment period is 3 years; one-third of the sale price is collected in 2012 and the rest in 2013. The tax rate was 35% in 2012, and 30% in 2013 and 30% in 2014. The accounting and tax data is shown below.

              Financial Accounting Tax Return  2012 (35% tax rate)        Income before temporary difference   $ 175,000 $ 175,000  Temporary difference   $ 75,000 $ 25,000  Income   $ 250,000 $ 200,000           2013 (30% tax rate)        Income before temporary difference   $ 200,000 $ 200,000  Temporary difference   $ - $ 25,000  Income   $ 200,000 $ 225,000           2014 (30% tax rate)        Income before temporary difference   $ 180,000 $ 180,000  Temporary difference   $ - $ 25,000  Income   $ 180,000 $ 205,000           Required:                 

 

1) Prepare the journal entries to record the income tax expense, deferred income taxes, and the income taxes payable for 2012, 2013, and 2014. No deferred income taxes existed at the beginning of 2012.

 

2) Explain how the deferred taxes will appear on the balance sheet at the end of each year. (Assume Installment Accounts Receivable is classified as a current asset.)

 

3) Show the income tax expense section of the income statement for each year, beginning with “Income before income taxes.”

Homework – Week 2 – Chapter 19

Problem 1 Answer: Answer:        1) Before deferred taxes can be computed, the amount of cumulative temporary difference existing at the end of each year must be computed:

             2012 2013 2014Pretax financial income $ 250,000 $ 200,000 $ 180,000

Taxable income $ 200,000 $ 225,000 $ 205,000 Temporary difference originating (reversing) $50,000 ($25,000) ($25,000)Cumulative temporary difference (Jan 1) $0 $50,000 $25,000 Cumulative temporary difference (Dec 31) $50,000 $25,000 $0 Def Tax Liab 17500 7500 02012        Income Tax Expense 87,500      Income Taxes Payable   70,000  Deferred Tax Liability     17,500         2013        Deferred Tax Liability 2,500      Income Tax Expense     2,500  (To record the adjustment for the decrease in the enacted tax rate)         Income Tax Expense 60,000    Deferred Tax Liability 7,500      Income Taxes Payable   67,500         2014        Income Tax Expense 54,000    Deferred Tax Liability 7,500      Income Taxes Payable   61,500         2)        2012        Current liabilities        Deferred tax liability   $17,500           2013        Current liabilities        Deferred tax liability   $7,500           2014        There is no deferred tax liability to be reported at this date.           

Homework – Week 2 – Chapter 19

3)        2012        

Income before income taxes     $ 250,000

Income tax expense        Current   $70,000    Deferred   17,500 87,500

Net income       $ 162,500

         2013        

Income before income taxes     $ 200,000

Income tax expense        Current   $67,500    Deferred   -7,500    Adjustment due to decrease tax rate -2,500 57,500

Net income       $ 142,500

         2014        

Income before income taxes     $ 180,000

Income tax expense        Current   $61,500    Deferred   -7,500 54,000

Net income       $ 126,000

Homework – Week 2 – Chapter 19

Problem 2:The Ambrosia Corporation's lead accountant shows the following info:           On Jan 1, 2012, Ambrosia purchased a bottling machine for $800000      

     A) Straight-line basis depreciation for 5 years for tax purposes (Use the half year convention for tax purposes, as discussed in Applendix 11A).    

      B) Use 8 year useful life for financial reporting         C) Tax- exempt municipal bonds yielded interest of $150000 in 2013.    

      D) Pretax financial income is $2300000 in 2012 and $2400000 in 2013.    

     E) The company recognized an extraordinary gain of $150000 in 2013 (which is fully taxable).

     F) Taxable income is expected in future years with an expected tax rate of 35%.  

                      Required:               1) Compute taxable income and income taxes payable for 2013.    

   2) Prepare the journal entries for income tax expense, income taxes payable, and

deferred taxes for 2013.

    3)Prepare the deferred income taxes presentation for Dec 31, 2013 balance sheet.  

               

Problem 2 Answer: Answer:          

 Book

DepreciationTax Depreciation Difference

2012 $100,000 $ 80,000 $ 20,000 2013 100,000 160,000 (60,000) 2014 100,000 160,000 (60,000) 2015 100,000 160,000 (60,000) 2016 100,000 160,000 (60,000) 2017 100,000 80000 20,000 2018 100,000 0 100,000 2019 100,000 0 100,000

Totals $800,000 $800,000 $0 1) Pretax financial income for 2013 $ 2,400,000  

Nontaxable interest $ (150,000)  

Excess depreciation ($160000 – $100000) $ (60,000)  

Taxable income for 2013 $ 2,190,000  

Tax rate   35%

Homework – Week 2 – Chapter 19

Income taxes payable for 2013 $ 766,500  

   

2) Income Tax Expense $ 787,500    

Income Taxes Payable $ 766,500  

Deferred Tax Liability 14,000  

Deferred Tax Asset 7,000  

   

*Def Tax Asset is sum of 2013-2019 tax-fin depr * tax rate - to reverse prior yr entry **Def Tax Liab is sum of 2014-2019 tax-fin depr * tax rate 3) Long-term liabilities Deferred tax liability 14,000