Solution manual intermediate accounting IFRS volume 1 kiesoch19

A second is to recognize deferred tax liabilities and assets for the future tax consequences of events that have already been recognized in the financial statements Examples of permanen

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CHAPTER 19 Accounting for Income Taxes

ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

Brief Exercises Exercises Problems

Concepts for Analysis

1 Reconcile pretax financial

income with taxable income

3 Determine deferred income

taxes and related items—

single tax rate

5 Determine deferred income

taxes and related items—

multiple tax rates, expected

future income

10 2, 13, 16, 17,

18, 20, 22

1, 2, 6, 7 1, 6, 7

6 Determine deferred taxes,

multiple rates, expected

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ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Learning Objectives

Brief

1 Identify differences between pretax

financial income and taxable income

1, 2, 5

2 Describe a temporary difference that

results in future taxable amounts

3 Describe a temporary difference that

results in future deductible amounts

5 Describe the presentation of income tax

expense in the income statement

7 Explain the effect of various tax rates and

tax rate changes on deferred income taxes

11 13, 16, 17, 18,

21, 23, 24, 25

5, 7

8 Apply accounting procedures for a loss

carryback and a loss carryforward

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ASSIGNMENT CHARACTERISTICS TABLE

Item

Description

Level of Difficulty

Time (minutes)

E19-1 One temporary difference, future taxable amounts, one rate, no

beginning deferred taxes

Simple 15–20

E19-2 Two differences, no beginning deferred taxes, tracked through

2 years

Simple 15–20

E19-3 One temporary difference, future taxable amounts, one rate,

beginning deferred taxes

Simple 15–20

E19-4 Three differences, compute taxable income, entry for taxes Simple 15–20 E19-5 Two temporary differences, one rate, beginning deferred taxes Simple 15–20 E19-6 Identify temporary or permanent differences Simple 10–15 E19-7 Terminology, relationships, computations, entries Simple 10–15 E19-8 Two temporary differences, one rate, 3 years Simple 10–15 E19-9 Carryback and carryforward of NOL, no temporary differences Simple 15–20 E19-10 Two NOLs, no temporary differences, entries and income

statement

Moderate 20–25 E19-11 Three differences, classify deferred taxes Simple 10–15 E19-12 Two temporary differences, one rate, beginning deferred taxes,

compute pretax financial income

Complex 20–25

E19-13 One difference, multiple rates, effect of beginning balance

versus no beginning deferred taxes

Simple 20–25

E19-16 Deferred tax liability, change in tax rate, prepare section of

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ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Item

Description

Level of Difficulty

Time (minutes)

P19-1 Three differences, no beginning deferred taxes, multiple rates Complex 40–45 P19-2 One temporary difference, tracked for 4 years, one permanent

difference, change in rate

Complex 50–60

P19-3 Second year of depreciation difference, two differences, single

rate

Complex 40–45

P19-4 Permanent and temporary differences, one rate Moderate 20–25

P19-6 Two differences, two rates, future income expected Moderate 20–25 P19-7 One temporary difference, tracked 3 years, change in rates,

income statement presentation

Complex 45–50

P19-8 Two differences, 2 years, compute taxable income and pretax

financial income

Complex 40–50

P19-9 Five differences, compute taxable income and deferred taxes,

draft income statement

Complex 40–50 CA19-1 Objectives and principles for accounting for income taxes Simple 15–20 CA19-2 Basic accounting for temporary differences Moderate 20–25 CA19-3 Identify temporary differences and classification criteria Complex 20–25 CA19-4 Accounting for deferred income taxes Moderate 20–25 CA19-5 Explain computation of deferred tax liability for multiple tax rates Complex 20–25 CA19-6 Explain future taxable and deductible amounts, how carryback

and carryforward affects deferred taxes

Complex 20–25 CA19-7 Deferred taxes, income effects Moderate 20–25

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ANSWERS TO QUESTIONS

1. Pretax financial income is reported on the income statement and is often referred to as income before income taxes Taxable income is reported on the tax return and is the amount upon which

a company’s income tax payable is computed

2 One objective of accounting for income taxes is to recognize the amount of taxes payable or refundable for the current year A second is to recognize deferred tax liabilities and assets for the future tax consequences of events that have already been recognized in the financial statements

Examples of permanent differences are: (1) interest received on certain types of government obligations (such interest is included in pretax financial income but is not included in taxable income), (2) charitable donations recognized as expense, but sometimes not deductible for tax purposes and (3) fines and expenses resulting from a violation of law Item (3) is an expense which is not deductible for tax purposes

4. A temporary difference is a difference between the tax basis of an asset or liability and its reported (carrying or book) amount in the financial statements that will result in taxable amounts

or deductible amounts in future years when the reported amount of the asset is recovered or when the reported amount of the liability is settled The temporary differences discussed in this chapter all result from differences between taxable income and pretax financial income which will reverse and result in taxable or deductible amounts in future periods

Examples of temporary differences are: (1) Sales accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes (2) Depreciation for financial reporting purposes is less than that deducted in tax returns in early years of assets’ lives because of using an accelerated depreciation method for tax purposes (3) Rent and royalties taxed when collected, but deferred for financial reporting purposes and recognized as revenue when earned in later periods (4) Unrealized holding gains or losses recognized in income for financial reporting purposes but deferred for tax purposes

5. An originating temporary difference is the initial difference between the book basis and the tax basis

of an asset or liability A reversing difference occurs when a temporary difference that originated

in prior periods is eliminated and the related tax effect is removed from the tax account

6. Book basis of assets € 900,000 Tax basis of assets 700,000 Future taxable amounts 200,000 Tax rate X 34% Deferred tax liability (end of 2011) € 68,000

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Questions Chapter 19 (Continued)

Tax basis of asset 0 Deferred tax liability (beginning of 2011) 68,000

Deferred tax liability (end of 2011) $30,600 Total income tax expense for 2011 $192,600

8. A future taxable amount will increase taxable income relative to pretax financial income in future periods due to temporary differences existing at the statement of financial position date A future deductible amount will decrease taxable income relative to pretax financial income in future periods due to existing temporary differences

A deferred tax asset is recognized for all deductible temporary differences However, a deferred tax asset should be reduced if, based on all available evidence, it is probable that some portion

or all of the deferred tax asset will not be realized

Deferred tax liability (beginning of 2011) 0 Deferred tax expense 28,000

10. Deferred tax accounts are reported on the statement of financial position as assets and liabilities They should be classified in a net non-current amount

11. Deferred tax assets and deferred tax liabilities are separately recognized and measured but are offset in the statement of financial position The net deferred tax asset or net deferred tax liability

is reported in the non-current section of the statement of financial position

12. Pretax financial income $550,000 Interest income on governmental bonds (70,000) Hazardous waste fine 25,000 Depreciation ($60,000 – $45,000) 15,000 Taxable income 520,000 Tax rate 30% Income tax payable $156,000

13. £200,000 (2013 taxable amount)

X 10% (30% – 20%)

£ 20,000 Decrease in deferred tax liability at the end of 2010

Deferred Tax Liability 20,000

Income Tax Expense 20,000

14. Some of the reasons for requiring income tax component disclosures are:

(a) Assessment of the quality of earnings Many investors seeking to assess the quality of a company’s earnings are interested in the relation of pre-tax financial income and taxable income Earnings that are enhanced by a favorable tax effect should be examined carefully, particularly if the tax effect is non-recurring

(b) Better prediction of future cash flows Examination of the deferred portion of income tax expense provides information as to whether taxes payable are likely to be higher or lower in the future

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15. The loss carryback provision permits a company to carry a net operating loss back two years and receive refunds for income taxes paid in those years The loss must be applied to the second preceding year first and then to the preceding year

The loss carryforward provision permits a company to carry forward a net operating loss twenty years, offsetting future taxable income The loss carryback can be accounted for with more certainty because the company knows whether it had taxable income in the past; such is not the case with income in the future

16. The company may choose to carry the net operating loss forward, or carry it back and then forward for tax purposes To forego the two-year carryback might be advantageous where a tax- payer had tax credit carryovers that might be wiped out and lost because of the carryback of the net operating loss In addition, tax rates in the future might be higher, and therefore on a present value basis, it is advantageous to carry forward rather than carry back

For financial reporting purposes, the benefits of a net operating loss carryback are recognized in the loss year The benefits of an operating loss carryforward are recognized as a deferred tax asset

in the loss year If it is probable that the asset will be realized, the tax benefit of the loss is also recognized by a credit to Income Tax Expense on the income statement Conversely, if it is probable that the loss carryforward will not be realized in future years, then no tax benefit is recognized on the income statement of the loss year

17. Many believe that future deductible amounts arising from net operating loss carryforwards are different from future deductible amounts arising from normal operations One rationale provided

is that a deferred tax asset arising from normal operations results in a tax prepayment—a prepaid tax asset In the case of loss carryforwards, no tax prepayment has been made

Others argue that realization of a loss carryforward is less likely—and thus should require a more severe test—than for a net deductible amount arising from normal operations Some have suggested that because of the nature of net operating losses, deferred tax assets should never

be established for these items

18. Both IFRS and U.S GAAP use the asset and liability approach for recording deferred tax assets In general, the differences between IFRS and U.S GAAP involve limited differences in the exceptions

to the asset-liability approach, some minor differences in the recognition, measurement and disclosure criteria, and differences in implementation guidance Following are some key elements for comparison

Under IFRS, an affirmative judgment approach is used by which a deferred tax asset is recognized up to the amount that is probable to be realized U.S GAAP uses an impairment approach In this situation, the deferred tax asset is recognized in full It is then reduced by a valuation account if it is more likely than not that all or a portion of the deferred tax asset will not be realized

IFRS uses the enacted tax rate or substantially enacted tax rate (Substantially enacted means virtually certain) For U.S GAAP the enacted tax rate must be used

The tax effects related to certain items are reported in equity under IFRS That is not the case under U.S GAAP, which charges or credits the tax effects to income

U.S GAAP requires companies to assess the likelihood of uncertain tax positions being tainable upon audit Potential liabilities must be accrued and disclosed if the position is ―more likely than not‖ to be disallowed Under IFRS, all potential liabilities must be recognized With respect to measurement, IFRS uses an expected value approach to measure the tax liability which differs from U.S GAAP

sus-The classification of deferred taxes under IFRS is always non-current U.S GAAP classifies deferred taxes based on the classification of the asset or liability to which it relates

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19. The IASB and the FASB have been working to address some of the differences in the accounting for income taxes Some of the issues under discussion are the term ―probable‖ under IFRS for recognition of a deferred tax asset, which might be interpreted to mean ―more likely than not‖ If changed, the reporting for impairments of deferred tax assets will be essentially the same between U.S GAAP and IFRS In addition, the IASB is considering adoption of the classification approach used in U.S GAAP for deferred tax assets and liabilities Also, U.S GAAP will likely continue to use the enacted tax rate in computing deferred taxes, except in situations where the U.S taxing jurisdiction is not involved In that case, companies should use IFRS which is based on enacted rates or substantially enacted tax rates Finally, the issue of allocation of deferred income taxes to equity for certain transactions under IFRS must be addressed in order to achieve convergence

At the time of this printing, deliberations on the Income Tax project have been suspended indefinitely

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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 19-1

2010 taxable income $120,000 Tax rate X 40% 12/31/10 income taxes payable $ 48,000

Excess depreciation on tax return €40,000 Tax rate X 30% Deferred tax liability €12,000

Income Tax Expense 67,500***

Deferred Tax Liability 12,000** Income Tax Payable 55,500*

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Book value of warranty liability £105,000 Tax basis of warranty liability 0 Cumulative temporary difference at 12/31/10 105,000 Tax rate X 40% 12/31/10 deferred tax asset £ 42,000

Deferred tax asset, 12/31/11 $59,000 Deferred tax asset, 12/31/10 30,000 Deferred tax benefit for 2011 (29,000) Current tax expense for 2011 61,000 Total tax expense for 2011 $32,000

Income Tax Expense 60,000

Deferred Tax Asset 60,000

Income Tax Payable ($148,000* X 45%) 66,600 Deferred Tax Liability ($10,000 X 45%) 4,500

*$154,000 + $4,000 – $10,000 = $148,000

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Income Tax Expense 120,000,000

Deferred Tax Liability

(¥2,000,000,000 X 6%) 120,000,000

Income Tax Refund Receivable 144,000

Benefit Due to Loss Carryback

Income Tax Refund Receivable (€350,000 X 40) 140,000

Benefit Due to Loss Carryback 140,000 Deferred Tax Asset (€500,000 – €350,000) X 40 60,000

Benefit Due to Loss Carryforward 60,000

Income Tax Refund Receivable (€350,000 X 40) 140,000

Benefit Due to Loss Carryback 140,000

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Taxable income for 2010 $210,000 Enacted tax rate X 30% Income tax payable for 2010 $ 63,000

Deferred tax liability at the end of 2010 $ 57,000 Deferred tax liability at the beginning of 2010 0 Deferred tax expense for 2010 (increase in

deferred tax liability) 57,000 Current tax expense for 2010

(Income tax payable) 63,000 Income tax expense for 2010 $120,000

Income Tax Payable 63,000 Deferred Tax Liability 57,000

(c) Income before income taxes $400,000 Income tax expense

Current $63,000

Deferred 57,000 120,000 Net income $280,000 Note: The current/deferred tax expense detail can be presented in the notes to the financial statements

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EXERCISE 19-2 (15–20 minutes)

(a) Pretax financial income for 2010 £350,000 Excess of tax depreciation over

book depreciation (40,000) Rent received in advance 25,000 Taxable income £335,000

(b) Income Tax Expense 140,000

Deferred Tax Asset 10,000*

Income Tax Payable (£335,000 X 40) 134,000 Deferred Tax Liability 16,000**

Temporary

Difference

Future Taxable (Deductible) Amounts

Tax Rate

Deferred Tax (Asset) Liability

£(10,000) £16,000

(c) Income Tax Expense 136,000*

Deferred Tax Liability (£10,000 X 40) 4,000

Income Tax Payable (£325,000 X 40) 130,000 Deferred Tax Asset (£25,000 X 40) 10,000

*(£130,000 – £4,000 + £10,000)

(a) Taxable income for 2010 $400,000 Enacted tax rate X 40% Income tax payable for 2010 $160,000

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EXERCISE 19-3 (Continued)

Deferred tax liability at the end of 2010 $140,000 Deferred tax liability at the beginning of 2010 90,000 Deferred tax expense for 2010 (increase

required in deferred tax liability) 50,000 Current tax expense for 2010 160,000 Income tax expense for 2010 $210,000 Income Tax Expense 210,000

Income Tax Payable 160,000 Deferred Tax Liability 50,000 (c) Income before income taxes $525,000

Income tax expense

Current $160,000 Deferred 50,000 210,000 Net income $315,000 Note to instructor: Because of the flat tax rate for all years, the amount

of cumulative temporary difference existing at the beginning of the year can be calculated by dividing $90,000 by 40%, which equals

$225,000 The difference between the $225,000 cumulative temporary difference at the beginning of 2010 and the $350,000 cumulative temporary difference at the end of 2010 represents the net amount of temporary difference originating during 2010 (which is $125,000) With this information, we can reconcile pretax financial income with taxable income as follows:

Pretax financial income $525,000 Temporary difference originating giving rise

to net future taxable amounts (125,000) Taxable income $400,000 EXERCISE 19-4 (15–20 minutes)

(a) Pretax financial income for 2010 € 80,000 Excess depreciation per tax return (16,000) Excess rent collected over rent earned 27,000 Nondeductible fines 11,000 Taxable income €102,000 Taxable income €102,000 Enacted tax rate X 30% Income tax payable € 30,600

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Temporary

Difference

Tax Rate

required in deferred tax liability) € 4,800 Deferred tax asset at the end of 2010 € 8,100 Deferred tax asset at the beginning of 2010 0 Deferred tax benefit for 2010 (increase

required in deferred tax asset) € (8,100) Deferred tax expense for 2010 € 4,800 Deferred tax benefit for 2010 (8,100) Net deferred tax benefit for 2010 (3,300) Current tax expense for 2010 (Income tax payable) 30,600 Income tax expense for 2010 €27,300 (c) Income before income taxes €80,000 Income tax expense

Current €30,600

Deferred (3,300) 27,300 Net income €52,700 Note: The details on the current/deferred tax expense may be presented

in a note to the financial statements

(d) €27,300

= 34.1% effective tax rate for 2010

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(a) Taxable income $115,000 Enacted tax rate X 40% Income tax payable $ 46,000

Temporary

Difference

Tax Rate

required in deferred tax liability) $ 48,000 Deferred tax asset at the end of 2010 $ (14,000 Deferred tax asset at the beginning of 2010 0 Deferred tax benefit for 2010 (increase

required in deferred tax asset) $ (14,000) Deferred tax expense for 2010 $ 48,000 Deferred tax benefit for 2010 (14,000) Net deferred expense for 2010 34,000 Current tax expense for 2010 (Income tax payable) 46,000 Income tax expense for 2010 $ 80,000

(c) Income before income taxes $200,000 Income tax expense

Current $46,000

Deferred 34,000 80,000 Net income $120,000 Note: The details on the current/deferred tax expense can be disclosed

in the notes to the financial statements

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Note to instructor: Because of the flat tax rate for all years, the amount

of cumulative temporary difference existing at the beginning of the year can be calculated by dividing the $40,000 balance in Deferred Tax Liability by 40%, which equals $100,000 This information may now be combined with the other facts given in the exercise to reconcile pretax financial income with taxable income as follows:

Pretax financial income $200,000 Net originating temporary difference

giving rise to future taxable amounts

($220,000 – $100,000) (120,000) Originating temporary difference giving

rise to future deductible amounts 35,000 Taxable income $115,000 EXERCISE 19-6 (10–15 minutes)

or 80% of the dividends received from other U.S corporations may be cluded from taxation because of a ―dividends received deduction.‖ These tax-exempt dividends create a permanent difference

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Income Tax Expense 336,000,000

Deferred Tax Asset (W20,000,000 X 40%) 8,000,000

(W30,000,000 X 40%) 12,000,000 Income Tax Payable

(W830,000,000 X 40%) 332,000,000

2011 Income Tax Expense 364,000,000

Deferred Tax Asset (W10,000,000 X 40%) 4,000,000

(W880,000,000 X 40%) 352,000,000

2012 Income Tax Expense 378,000,000

Deferred Tax Asset

(W8,000,000 X 40%) 3,200,000

in the notes to the financial statements

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2008 Income Tax Expense 36,000

Income Tax Payable ($90,000 X 40%) 36,000

2009 Income Tax Refund Receivable

($160,000 X 45%) 72,000

(Income Tax Expense) 72,000

2010 Income Tax Refund Receivable 36,000

(Income Tax Expense) ($90,000 X 40%) 36,000

Benefit Due to Loss Carryforward

(Income Tax Expense)

[40% X ($350,000 – $90,000)] 104,000

Deferred Tax Asset (40% X $120,000) 48,000

Deferred Tax Asset ($100,000 X 40%) 40,000 Note: Benefit Due to Loss Carryback and Benefit Due to Loss Carryforward amounts are negative components of income tax expense

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(a) Income Tax Refund Receivable

[(€22,000 X 35%) + (€48,000 X 50%)] 31,700

Benefit Due to Loss Carryforward 32,000 (€150,000 – €22,000 – €48,000 = €80,000)

(€80,000 X 40% = €32,000)

(b) Operating loss before income taxes €(150,000) Income tax benefit

Benefit due to loss carryback €31,700

Benefit due to loss carryforward 32,000 63,700 Net loss € (86,300)

(c) Income Tax Expense 36,000

Deferred Tax Asset 32,000 Income Tax Payable

(e) Income Tax Refund Receivable

(€50,000 X 40%) 20,000

(f) Operating loss before income taxes € (50,000) Income tax benefit

Benefit due to loss carryback 20,000 Net loss € (30,000)

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Resulting Deferred Tax

of the deferred tax liability of $60,000 and the deferred tax asset of

$20,000

$60,000 ÷ 40% = $150,000 beginning cumulative temporary difference

$20,000 ÷ 40% = $ 50,000 beginning cumulative temporary difference

Cumulative temporary difference at 12/31/10

which will result in future taxable amounts $210,000 Cumulative temporary difference at 1/1/10

which will result in future taxable amounts (150,000) Originating difference in 2010 which will

result in future taxable amounts $ 60,000

Cumulative temporary difference at 12/31/10

which will result in future deductible amounts $ 95,000 Cumulative temporary difference at 1/1/10

which will result in future deductible amounts (50,000) Originating difference in 2010 which will

result in future deductible amounts $ 45,000

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Pretax financial income $ X Originating difference which will result in future

taxable amounts (60,000) Originating difference which will result in future

deductible amounts 45,000 Taxable income for 2010 $115,000

Solving for pretax financial income:

X – $60,000 + $45,000 = $115,000

X = $130,000 = Pretax financial income

Income Tax Payable ($115,000 X 40%) 46,000 Deferred Tax Liability 24,000

Temporary

Difference

Tax Rate

required in deferred tax liability) $ 24,000

Deferred tax asset at the end of 2010 $ (38,000 Deferred tax asset at the beginning of 2010 20,000 Deferred tax benefit for 2010 (net increase

required in deferred tax asset) $ (18,000)

Deferred tax expense for 2010 $ 24,000 Deferred tax benefit for 2010 (18,000) Net deferred tax expense (benefit) for 2010 6,000 Current tax expense for 2010 (Income tax payable) 46,000 Income tax expense for 2010 $ 52,000

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(d) Because of the same tax rate for all years involved and no permanent differences, the effective rate should equal the statutory rate The following calculation proves that it does: $52,000 ÷ $130,000 = 40% effective tax rate for 2010

(a) Income Tax Expense 187,000

Taxable income for 2010 €340,000 Enacted tax rate X 40% Income tax payable for 2010 €136,000

Future Years

Future taxable (deductible)

Enacted tax rate X 30% X 30% X 25% X 25%

Deferred tax liability (asset) €21,000 €15,000 €10,000 € 5,000 € 51,000

Deferred tax liability at the end of 2010 € 51,000 Deferred tax liability at the beginning of 2010 0 Deferred tax expense for 2010 (net increase

required in deferred tax liability) 51,000 Current tax expense for 2010 136,000 Income tax expense for 2010 €187,000

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The Income Tax Payable for 2010 of €136,000 and the €51,000 balance for Deferred Tax Liability at December 31, 2010, would be computed the same as they were for part (a) of this exercise The resulting change in the deferred tax liability and total income tax expense would

be computed as follows:

Deferred tax liability at the end of 2010 € 51,000 Deferred tax liability at the beginning of 2010 (22,000) Deferred tax expense for 2010 (net increase

required in deferred tax liability) 29,000 Current tax expense for 2010 (Income tax payable) 136,000 Income tax expense for 2010 €165,000

Income Tax Payable 340,000

Taxable income $850,000 Enacted tax rate X 40% Income tax payable $340,000

Date

Cumulative Future Taxable (Deductible) Amounts Tax Rate

Deferred tax asset at the end of 2011 $200,000 Deferred tax asset at the beginning of 2011 150,000 Deferred tax benefit for 2011 (increase in

deferred tax asset) (50,000) Current tax expense for 2011 (Income tax payable) 340,000 Income tax expense for 2011 $290,000

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(b) The journal entry at the end of 2011:

Deferred Tax Asset 30,000 Note to instructor: Although not requested by the instructions, the pretax financial income can be computed by completing the following reconciliation:

Pretax financial income for 2011 $ X Originating difference which will result

in future deductible amounts 125,000 a Taxable income for 2011 $850,000 Solving for pretax financial income:

X + $125,000 = $850,000

X = $725,000 = Pretax financial income

a $500,000 – $375,000 = $125,000

Deferred Tax Asset ($200,000 – $20,000) 180,000

Income Tax Payable 340,000 Income Tax Expense 200,000

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*The prior tax rate of 40% is computed by dividing the $800,000 balance of the deferred tax liability account at January 1, 2010, by the $2,000,000 cumulative temporary difference at that same date

The deferred tax liability balance of $740,000 is reported as a current liability on the 2010 statement of financial position

non-(b) Deferred Tax Liability 60,000

There are no changes during 2010 in the cumulative temporary difference The entire change in the deferred tax liability account is due

to the change in the enacted tax rate That change is computed as follows:

Deferred tax liability at the end of 2010 $ 740,000 (computed in (a))

Deferred tax liability at the

beginning of 2010 (800,000) Deferred tax benefit for 2010 due to change

in enacted tax rate (decrease in deferred

tax liability required) $ (60,000)

(c) Income before income taxes $5,000,000* Income tax expense

Current $2,000,000**

Adjustment due to change

in tax rate (60,000) 1,940,000 Net income $3,060,000

*Pretax financial income is equal to the taxable income for 2010 because there were no changes in the cumulative temporary difference and no permanent differences

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**Taxable income for 2010 $5,000,000 Tax rate for 2010 (computed in (a)) X 40% Current tax expense $2,000,000

Current tax expense for 2010 would also need to be recorded The entry would be a debit to Income Tax Expense and a credit to Income Tax Payable for $2,000,000

Journal entry at December 31, 2010:

Taxable income for 2010 $163,000 Enacted tax rate 45% Income tax payable for 2010 $ 73,350

The deferred tax account balances at December 31, 2010, are determined

as follows:

Temporary

Difference

Future Taxable (Deductible) Amounts Rate

required in deferred tax liability) $ 6,400

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Deferred tax asset at the end of 2010 $( 4,000 Deferred tax asset at the beginning of 2010 0 Deferred tax expense (benefit) for 2010 (net

increase required in deferred tax asset) $ (4,000)

Deferred tax expense for 2010 $ 6,400 Deferred tax benefit for 2010 (4,000) Net deferred tax expense for 2010 2,400 Current tax expense for 2010 (Income tax payable) 73,350 Income tax expense for 2010 $75,750

Deferred Tax Liability 3,200

Income Tax Payable 85,200 Deferred Tax Asset 2,000

Taxable income $213,000 Enacted tax rate X 40% Income tax payable for 2011 $ 85,200

The deferred tax account balances at December 31, 2011, are determined

as follows:

Temporary

Difference

Future Taxable (Deductible) Amounts Rate

required in deferred tax liability) $ (3,200)

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Deferred tax asset at the end of 2011 $ 2,000 Deferred tax asset at the beginning of 2011 (4,000) Deferred tax expense for 2011 (decrease

required in deferred tax asset) $ 2,000

Deferred tax benefit for 2011 $ (3,200) Deferred tax expense for 2011 2,000 Net deferred tax benefit for 2011 (1,200) Current tax expense for 2011 (Income tax payable) 85,200 Income tax expense for 2011 $84,000

Deferred Tax Liability 3,200

Income Tax Payable 37,200 Deferred Tax Asset 2,000

Taxable income for 2012 $93,000 Enacted tax rate X 40% Income tax payable for 2012 $37,200

Deferred tax liability at the end of 2012 $ 0 Deferred tax liability at the beginning of 2012 3,200 Deferred tax benefit for 2012 (decrease

required in deferred tax liability) $ (3,200)

Deferred tax asset at the end of 2012 $ 0 Deferred tax asset at the beginning of 2012 2,000 Deferred tax expense for 2012 (decrease

required in deferred tax asset) $ 2,000

Deferred tax benefit for 2012 $ (3,200) Deferred tax expense for 2012 2,000 Net deferred tax benefit for 2012 (1,200) Current tax expense for 2012

(Income tax payable) 37,200 Income tax expense for 2012 $36,000

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Tax Rate

December 31, 2010 Deferred Tax (Asset) Liability

Income Tax Payable 89,600 Deferred Tax Liability 44,100 Taxable income £224,000 Tax rate X 40% Income tax payable £ 89,600 Deferred tax liability at the end of 2010 £ 44,100 Deferred tax liability at the beginning of 2010 0 Deferred tax expense for 2010 (net increase

required in deferred tax liability) £ 44,100 Deferred tax asset at the end of 2010 £ 35,000 Deferred tax asset at the beginning of 2010 0 Deferred tax benefit for 2010 (net increase

required in deferred tax asset) £ (35,000) Deferred tax expense for 2010 £ 44,100 Deferred tax benefit for 2010 (35,000) Net deferred tax expense for 2010 9,100 Current tax expense for 2010

(Income tax payable) 89,600 Income tax expense for 2010 £ 98,700

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¥90 million estimated costs per books 40% ¥(36)

¥50 million excess depreciation per tax 40% ¥20

(b) Non-current assets

Deferred tax asset

(¥36,000,000 – ¥20,000,000) ¥ 16,000,000 (c) Income before income taxes ¥ 95,000,000 2 Income tax expense

Current ¥64,000,000 1

Deferred (26,000,000) 3 38,000,000 4 Net income ¥ 57,000,000

1

Taxable income for 2010 ¥160,000,000 Enacted tax rate X 40% Income tax payable for 2010 ¥ 64,000,000

at the beginning of 2010 (25,000,000) Taxable temporary difference originating

during 2010 ¥ 25,000,000 Cumulative deductible temporary difference

at the end of 2010 ¥ 90,000,000 Cumulative deductible temporary difference

at the beginning of 2010 0 Deductible temporary difference originating

during 2010 ¥ 90,000,000

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Pretax financial income for 2010 ¥ X Taxable temporary difference originating (25,000,000) Deductible temporary difference originating 90,000,000 Taxable income for 2010 ¥160,000,000 Solving for X:

deferred tax liability) ¥ 10,000,000 Deferred tax asset at the end of 2010 ¥ 36,000,000 Deferred tax asset at the beginning of 2010 0 Deferred tax benefit for 2010 (increase in

deferred tax asset) (36,000,000) Deferred tax expense for 2010 10,000,000 Net deferred tax benefit for 2010 ¥ (26,000,000)

4

Net deferred tax benefit for 2010 ¥ (26,000,000) Current tax expense for 2010 (Income tax payable) 64,000,000 Income tax expense for 2010 ¥ 38,000,000 EXERCISE 19-20 (15–20 minutes)

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Taxable income for 2010 $550,000 Tax rate X 34% Income tax payable for 2010 $187,000

Deferred tax liability at the end of 2010 $ 20,000 Deferred tax liability at the beginning of 2010 0 Deferred tax expense for 2010 (increase

in deferred tax liability account) $ 20,000

Deferred tax asset at the end of 2010 $ 51,000 Deferred tax asset at the beginning of 2010 0 Deferred tax benefit for 2010 (increase in

deferred tax asset) $ (51,000)

Deferred tax benefit for 2010 $ (51,000) Deferred tax expense for 2010 20,000 Net deferred tax benefit for 2010 (31,000) Current tax expense for 2010 (Income tax payable) 187,000 Income tax expense for 2010 $156,000 (b) Non-current assets

Deferred tax asset ($51,000 – $20,000) $ 31,000

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Income Tax Payable 136,000 Deferred Tax Liability 89,600 Taxable income $400,000 Enacted tax rate X 34% Income tax payable $136,000

Temporary

Difference

Tax Rate

Tax rate for 2011

2 Tax rate for 2012–2015

Deferred tax liability at the end of 2010 $ 89,600 Deferred tax liability at the beginning of 2010 0 Deferred tax expense for 2010 (increase

required in deferred tax liability) $ 89,600 Deferred tax asset at the end of 2010 $ (12,920 Deferred tax asset at the beginning of 2010 0 Deferred tax benefit for 2010 (increase

required in deferred tax asset) $ (12,920) Deferred tax expense for 2010 $ 89,600 Deferred tax benefit for 2010 (12,920) Net deferred tax expense for 2010 76,680 Current tax expense for 2010 (Income tax payable) 136,000 Income tax expense for 2010 $212,680 (b) Non-current liabilities

Deferred tax liability ($89,600 – $12,920) $ 76,680

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Taxable income $300,000 Enacted tax rate X 34% Income tax payable $102,000

Temporary

Difference

Tax Rate

required in deferred tax liability) $ 17,000 Deferred tax asset at the end of 2010 $ 6,800 Deferred tax asset at the beginning of 2010 0 Deferred tax benefit for 2010 (increase

required in deferred tax asset) $ (6,800) Deferred tax expense for 2010 $ 17,000 Deferred tax benefit for 2010 (6,800) Net deferred tax expense for 2010 10,200 Current tax expense for 2010 (Income tax payable) 102,000 Income tax expense for 2010 $112,200 (b) Non-current liabilities

Deferred tax liability ($17,000 – $6,800) $ 10,200

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Income Tax Payable (£110,000 X 34%) 37,400

Income Tax Payable (£90,000 X 34%) 30,600

2011 Income Tax Refund Receivable 68,000

Benefit Due to Loss Carryback 68,000** Benefit Due to Loss Carryforward 22,800**

**[34% X £(110,000)] + [34% X £(90,000)] = £68,000

**38% X (£260,000 – £110,000 – £90,000) = £22,800

Income Tax Payable 60,800* Deferred Tax Asset 22,800

*[(£220,000 – £60,000) X 38%]

(b) Operating loss before income taxes £(260,000) Income tax benefit

Benefit due to loss carryback £68,000

Benefit due to loss carryforward 22,800 90,800 Net loss £(169,200)

Benefit Due to Loss Carryback 68,000* Benefit Due to Loss Carryforward 17,100**

**[34% X £(110,000)] + [34% X £(90,000)] = £68,000

**38% X [(£260,000 – £110,000 – £90,000)] X 3/4 = £17,100

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Deferred Tax Asset 17,100 Benefit Due to Loss Carry Forward

(£60,000 X 38 X 1/4) 5,700 Income Tax Payable

[($220,000 – $60,000) X 38%] 60,800 (d) Operating loss before income taxes £(260,000) Income tax benefit

Benefit due to loss carryback £68,000

Benefit due to loss carryforward 17,100 85,100 Net loss £(174,900) Note: Using the assumption in part (a), the income tax section of the

2012 income statement would appear as follows:

Income before income taxes £220,000 Income tax expense

Current £60,800 Deferred 22,800 83,600

Note: Using the assumption in part (c), the income tax section of the

2012 income statement would appear as follows:

Income before income taxes £220,000 Income tax expense

Current £60,800 Deferred 17,100 Benefit due to loss carry forward (5,700) 72,200 Net income £147,800

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Income Tax Payable (€100,000 X 40%) 40,000

2010

Income Tax Payable (€90,000 X 40%) 36,000

2011

**[40% X €(100,000)] + [40% X €(90,000)] = €76,000

**45% X [(€240,000 – €100,000 – €90,000)] X 1/2 = €11,250

2012

Deferred Tax Asset 11,250 Benefit Due to Loss Carryforward 11,250 Income Tax Payable

[(€120,000 – €50,000) X 45%] 31,500

(b) Operating loss before income taxes €(240,000) Income tax benefit

Benefit due to loss carryback €76,000

Benefit due to loss carryforward 11,250 87,250 Net loss €(152,750)

(c) Income before income taxes € 120,000 Income tax expense

Current €31,500

Deferred 11,250

Benefit due to loss carryforward (11,250) 31,500 Net income € 88,500

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Income Tax Expense ($90,000 X 40) 36,000

2012

**($350,000 X 34) + ($90,000 X 40)

**[($550,000 – $350,000 – $90,000) X 40] X 4/5

2013

Income Tax Expense ($180,000 X 40) 72,000

Income Tax Payable

[($180,000 – $110,000) X 40] 28,000 Deferred Tax Asset 35,200 Benefit Due to Loss Carryforward 8,800

(b) Loss before income taxes $(550,000) Income tax benefit

Benefit due to loss carryback $155,000

Benefit due to loss carryforward 35,200 190,200 Net loss $(359,800)

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TIME AND PURPOSE OF PROBLEMS

Problem 19-1 (Time 40–45 minutes)

Purpose—to provide the student with an understanding of how to compute and properly classify deferred income taxes when there are three types of temporary differences A single tax rate applies The student is required to compute and classify deferred income taxes Also, the student must use data given to solve for both taxable income and pretax financial income The latter computation is complicated

by the fact there are deferred taxes at the beginning of the year

Purpose—to provide the student with a situation where: (1) a temporary difference originates over a three-year period and begins to reverse in the fourth period, (2) a change in an enacted tax rate occurs

in a year in which there is a change in the amount of cumulative temporary difference, (3) the amount of originating or reversing temporary difference must be calculated each year in order to determine the cumulative temporary difference at the end of each year, and (4) there is a permanent difference along with a temporary difference each year Journal entries are required for each of four years, including the entry for the adjustment of deferred taxes due to the change in the enacted tax rate

Purpose—to provide the student with an understanding of how future temporary differences for existing depreciable assets are considered in determining the future years in which existing temporary differences result in taxable or deductible amounts The student is given information about pretax financial income, one temporary difference, and one permanent difference The student must compute all amounts related to income taxes for the current year and prepare the journal entry to record them In order to determine the beginning balance in a deferred tax account, the student must calculate deferred taxes for the prior year’s statement of financial position An income statement presentation is also required and a discontinued operations gain is recognized in the current period

Purpose—to provide the student with an understanding of permanent and temporary differences when there are multiple differences and a single rate

Purpose—to provide the student with a situation involving a net operating loss which can be partially offset by prior taxes paid using the carryback provision Journal entries for the loss year and two subsequent years are required The benefits of the loss carryforward are realized in the year following the loss year Income statement presentations are required for the loss year where the benefits of the carryback and the carryforward are recognized and the year following the loss year where the benefits

of the carryforward are realized

Purpose—to provide the student with an understanding of how the computation and classification of deferred income taxes are affected by the individual future year(s) in which future taxable and deductible amounts are scheduled to occur because of existing temporary differences Two situations are given and the student is required to compute and classify the deferred income taxes for each A net deferred tax asset results in both cases

Purpose—to provide the student with a situation where: (1) a temporary difference originates in one period and reverses over the following two periods, (2) a change in an enacted tax rate occurs in a year

in which there is a change in the amount of cumulative temporary difference, and (3) the amount of originating or reversing temporary difference must be calculated each year in order to determine the cumulative temporary difference at the end of each year Journal entries are required for each of three years, including the entry for the adjustment of deferred taxes due to the change in the enacted tax rate

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