Defd tax in class problems to print

For simplification, assume the company reports one expense, depreciation, over the three years applying the straight-line method for financial reporting purposes GAAP and MACRS IRS for t

Deferred Tax Examples

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problems during class

Acct 414

Illustration Assume the company reports revenue in

2007, 2008, and 2009 of $130,000, respectively

The revenue is reported the same for both GAAP and

tax purposes For simplification, assume the company

reports one expense, depreciation, over the three

years applying the straight-line method for financial

reporting purposes (GAAP) and MACRS (IRS) for the

tax return What is the effect on the accounts of

using the two different depreciation methods?

Fundamentals of Accounting for Income Taxes

Revenues

Expenses (S/L depreciation)

Pretax financial income

Income tax expense (40%)

$130,000 30,000

$100,000

$40,000

$130,000

2008

30,000

$100,000

$40,000

$130,000

2009

30,000

$100,000

$40,000

$390,000

Total

90,000

$300,000

$120,000

GAAP Reporting

GAAP Reporting

Revenues

Expenses (MACRS depreciation)

Pretax financial income

Income tax payable (40%)

$130,000

2007

40,000

$90,000

$36,000

$130,000

2008

30,000

$100,000

$40,000

$130,000

2009

20,000

$110,000

$44,000

$390,000

Total

90,000

$300,000

$120,000

Tax Reporting

2007

LO 1 Identify differences between pretax financial income and taxable income.

Book vs Tax Difference

Example – Deferred Tax Liability

• Assume that Sales Company recognizes $15,000 gross profit from installment sales for financial accounting in 2006 The gross profit will be taxable at $3,000 each year for the next five years The

company earns $10,000 additional income each year and the tax rate is 40% The following schedule shows taxable income, income tax payable, financial income, and income tax expense for the five year period.

Example – Deferred Tax Asset

Financial Magazine Company received $15,000 of

subscriptions in advance for 2006 Subscription revenue will be recognized equally in 2007, 2008, and 2009, for

financial accounting purposes but all of the $15,000 will be recognized in 2006 for tax purposes There is additional income of $50,000 each year and the tax rate is 40%

E19-1 South Carolina Corporation has one temporary

difference at the end of 2007 that will reverse and cause taxable amounts of $55,000 in 2008, $60,000 in 2009, and

$65,000 in 2010 South Carolina’s pretax financial income for 2007 is $300,000, and the tax rate is 30% for all years There are no deferred taxes at the beginning of 2007.

Instructions

a) Compute taxable income and income taxes payable for 2007.

b) Prepare the journal entry to record income tax expense,

deferred income taxes, and income taxes payable for 2007.

South Carolina Corporation

Columbia Corporation has one temporary difference at

the end of 2007 that will reverse and cause deductible amounts of $50,000 in 2008, $65,000 in 2009, and

$40,000 in 2010 Columbia’s pretax financial income for 2007 is $200,000 and the tax rate is 34% for all years There are no deferred taxes at the beginning

of 2007 Columbia expects to be profitable in the

future

Instructions

a) Compute taxable income and income taxes payable for 2007.

b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2007.

Columbia Corporation

Zoop Inc incurred a net operating loss of

$500,000 in 2007 Taxable income was

$200,000 for 2005 and $200,000 for 2006

The tax rate for all years is 40% Zoop elects the carryback option Prepare the journal

entries to record the benefits of the loss

carryback and the loss carryforward.

Zoop Inc (NOL)

Now assume that it is more likely than not that the entire net operating loss

carryforward will not be realized by Zoop Inc in future years Prepare all the

journal entries necessary at the end of

2007.

Zoop Inc (Variation)

Valis Corporation had the following tax information.

Valis Corporation (NOL)

Taxable Tax Taxes Year Income Rate Paid

2004 $ 300,000 35% $ 105,000

2005 325,000 30% 97,500

2006 400,000 30% 120,000

In 2007 Valis suffered a net operating loss of

$450,000, which it elected to carry back The

2007 enacted tax rate is 29% Prepare Valis’s entry

At the end of 2002, the corporate tax rate is

changed from 40% to 35% The new rate is

effective January 1, 2004.

The deferred tax account (1/1/2002) is as

follows:

Excess tax depreciation: $3 million

Deferred tax liability: $1.2 million

Related taxable amounts are expected to occur equally over 2003, 2004, and 2005.

Example:

Revision of Future Tax Rate

Example:

Revision of Future Tax Rate

Zurich Company reports pretax financial income of $70,000 for

2007 The following items cause taxable income to be different

than pretax financial income (1) Depreciation on the tax return is greater than depreciation on the income statement by $16,000 (2) Rent collected on the tax return is greater than rent earned on the income statement by $22,000 (3) Fines for pollution appear as an expense of $11,000 on the income statement.

Zurich’s tax rate is 30% for all years, and the company expects to report taxable income in all future years There are no deferred taxes at the beginning of 2007.

Instructions Prepare the journal entry to record income tax

expense, deferred income taxes, and income taxes payable for

2007.

Review Problem