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CHAPTER 13 Income Tax Reporting 219
Requirement:
Prepare the journal entry to record income tax expense for the year ended December 31, 2019.
96. The Sting Company began operations at the beginning of 2018 and had GAAP (book) income of
$350,000 and taxable income of $280,000. During 2018, depreciation expense for tax purposes exceeded
GAAP (book) depreciation expense by $210,000, while warranty expense for GAAP (book) purposes
exceeded warranty expense for tax purposes by $140,000. These two temporary differences will reverse
as follows:
Depreciation Warranty
CHAPTER 13 Income Tax Reporting 220
2019 $35,000 70,000
2020 70,000 56,000
2021 105,000 $14,000
The enacted income tax rate for 2018 and 2019 is 38%, while the enacted income tax rate for 2020 and
2021 is 40%. Sting did not make any income tax payments during 2018.
Requirement:
Prepare the journal entry to record income tax expense for the year ended December 31, 2018.
97. On January 1, 2018, Sun Company’s balance sheet reported a deferred tax liability of $185,000 and a
deferred tax asset of $99,900. The future taxable amounts that existed as of January 1, 2018, will reverse
equally over the next four years beginning in 2018, while the future deductible amounts that existed as of
January 1, 2018, will reverse equally over the next three years beginning in 2018. The enacted income tax
rate for all tax years as of January 1, 2018, was 37%. On February 1, 2018 the tax laws were amended
resulting in income tax rates of 38% for 2018 and 2019; the income tax rate will be 40% for tax years
2020 and later.
Requirement:
Prepare the journal entry on February 1, 2018 to record the impact of the amended income tax rates.
98. Tyler Company, which began operations at the beginning of 2018, has provided you with the
following information:
• GAAP (book) income before taxes was $1,600,000 during 2018 and $2,000,000 during 2019.
• Municipal bond interest of $40,000 was earned in both 2018 and 2019.
• Depreciation expense for tax purposes exceeded depreciation for GAAP (book) purposes by
$180,000 during 2018 and by $150,000 during 2019. The depreciation temporary difference
created during 2018 and 2019 will reverse equally during the next three years (2020 – 2022).
• A three-year insurance policy costing $54,000 was purchased using cash at the beginning of
2018. The policy was deducted in the income statement equally for each year of the policy. The
amount allowable as a deduction for tax purposes of $24,000 was taken in 2018, and $15,000 will
each be deducted in 2019 and in 2020.
• Revenues of $600,000 from various long-term construction contracts was recognized for GAAP
(book) purposes during 2018. For tax purposes, $100,000 of those revenues were recognized
during 2018, the remaining revenues will be recognized equally during 2019 and 2020.
• During 2019, a customer paid $325,000 in advance for services to be provided during 2019 and
2020. Services valued at $120,000 were provided during 2019.
• The income tax rate was 35% during 2018 and 2019 and 40% for all subsequent years.
Requirements:
1. Determine taxable income for 2018.
2. Prepare the journal entry to record income tax expense for the year ended December 31, 2018.
3. Determine taxable income for 2019.
4. Prepare the journal entry to record income tax expense for the year ended December 31, 2019.
Answer:
99. Toner Company, which began operations at the beginning of 2018, has provided you with the
following information:
• GAAP (book) income before taxes was $1,600,000 during 2018 and $2,000,000 during 2019.
• Municipal bond interest of $40,000 was earned in both 2018 and 2019.
• Depreciation expense for tax purposes exceeded depreciation for GAAP (book) purposes by
$180,000 during 2018 and by $150,000 during 2019.
• A three-year insurance policy costing $54,000 was purchased using cash at the beginning of
2018. The policy was deducted in the income statement equally for each year of the policy. For
tax purposes, $24,000 was allowable as a deduction in 2018, and the remainder will be deducted
equally in 2019 and in 2020.
CHAPTER 13 Income Tax Reporting 223
• Revenues of $600,000 from various long-term construction contracts were recognized for GAAP
(book) purposes during 2018. For tax purposes, $100,000 of those revenues were recognized
during 2018, the remaining revenues will be recognized equally during 2019 and 2020.
• During 2019, a customer paid $325,000 in advance for services to be provided during 2019 and
2020. Services valued at $120,000 were provided during 2019.
• The income tax rate was 30% for all years.
Requirements:
1. Determine taxable income for 2018.
2. Prepare the journal entry to record income tax expense for the year ended December 31, 2018.
3. Determine taxable income for 2019.
4. Prepare the journal entry to record income tax expense for the year ended December 31, 2019.
Answer:
100. For each of the items below, determine whether the items are temporary differences or
permanent differences. Also, for each temporary difference, determine whether a deferred tax asset or
deferred tax liability is created by the temporary difference described. Assume that each of the temporary
differences described is an originating difference.
1. Municipal bond interest
2. Accrued warranty expense
3. Sales revenues received in advance
4. Prepaid insurance where the tax deduction in future years will be less than the book expense
5. Tax depreciation expense exceeds GAAP (book) depreciation expense
6. Accrued bad debt expense
7. The dividends received deduction
8. Sales revenue recognized currently for GAAP, recognized for tax purposes in future years)
9. Life insurance payments for executives for which the company is the beneficiary
10. Fines paid for law violations
Answer:
101. Colorado Company has provided you the following information:
Year Taxable income Income tax rate
2018 $390,000 35%
2019 $320,000 37%
2020 $400,000 40%
CHAPTER 13 Income Tax Reporting 225
2021 ($1,200,000) 40%
Colorado has decided to use the loss carryback and carryforward provision as a result of the year 2021
loss. The enacted tax rate remains at 40% after year 2021. Colorado has determined that a valuation
allowance is not necessary.
Requirement:
Prepare the journal entry on December 31, 2021 to record the carryback and carryforward decision.
Answer:
102. K. Shuman purchased a landscape maintenance firm on 1/2/ 2018 and renamed the firm Shuman
Enterprises. Information regarding the firm for the first two years of operation is shown below:
a. Pretax GAAP income was $100,000 in 2018 and $150,000 in 2019.
b. Heavy equipment acquired in the purchase was valued at $120,000. The equipment had a
life of 4 years and no salvage value. Depreciation for tax purposes was $48,000 in 2018
and $36,000 in 2019. Depreciation for GAAP purposes was $30,000 in each year.
c. In 2019, pretax GAAP income included $12,500 of interest on State of Indiana Bonds.
This interest is not taxable for U.S. federal purposes.
d. During 2018, $40,000 was collected in advance for landscape maintenance to be
performed in 2019. This amount was included in 2018 taxable income but was not
included in GAAP income until 2019. In 2019, $25,000 was collected in advanced for
work to be performed in 2020. This amount was recognized as income for tax purposes in
2019 but will not be recognized as income for GAAP purposes until 2020.
e. The enacted tax rate for 2018 was 30%. The newly enacted tax rate for 2019 and
subsequent years is 38%.
f. At December 31, 2018, the Deferred tax asset account had a $12,000 debit balance, and
the Deferred tax liability account had a $5,400 credit balance.
Required:
1. Compute Shuman’s GAAP income tax expense for the year ended December 31, 2019.
Answer:
CHAPTER 13 Income Tax Reporting 226
103. Spitzer Corporation manufactures supplies for drycleaning services. On October 1, 2017, it
purchased a new machine at a cost of $10 million. For financial reporting purposes, it depreciates the
machine over its expected useful life of 20 years on a straight-line basis with no salvage value. Because
of the timing of the purchase, depreciation is taken for one-fourth of a year in 2017.
For tax purposes, the machine qualifies as “10-year property.” For 10-year property, depreciation rates
(all as a percentage of the initial investment) are 10% in the year the property was acquired, 18% the next
year, then 14.4%, 11.52%, 9.22%, 7.37%, 6.55%, 6.55%, 6.56%, 6.55%, 3.28%. Note that depreciation
of 10% is taken for tax purposes in the year of acquisition regardless of when during the year the asset
was acquired.
Ignore any deferred tax items that arise from any other sources. Assume a 40% tax rate.
Required:
a) What is the amount of Spitzer’s depreciation expense for financial reporting purposes in 2017?
b) What is the amount of Spitzer’s depreciation expense for tax purposes in 2017?
c) What is the amount of Spitzer’s depreciation expense for financial reporting purposes in 2018?
d) What is the amount of Spitzer’s depreciation expense for tax purposes in 2018?
e) Determine whether Spitzer has a deferred tax asset or a deferred tax liability as of December 31,
2017. What is the balance of this item at December 31, 2017?
f) What is the amount of Spitzer’s deferred tax asset or deferred tax liability as of December 31, 2018?
g) What is the amount of the deferred portion of Spitzer’s 2018 income tax expense?
104. The following analysis was adapted from KrisKraft’s 2017 Form 10-K. Use it to answer the
questions that follow. KrisKraft reported income taxes payable of $151 million at December 31, 2016
and $100 million at December 31, 2017.
2017
2016
2015
(in millions)
Earnings from continuing operations
before income taxes:
United States
$
2,454
$
2,754
$
2,774
Outside United States
1,273
1,257
1,339
Total
$
3,727
$
4,011
$
4,113
Provision for income taxes:
United States federal:
Current
$
722
$
613
$
876
Deferred
(306
)
(150
)
(210
)
416
463
666
State and local (all current)
116
95
115
Total United States
532
558
781
Outside United States:
Current
660
411
466
Deferred
(55
)
(18
)
(38
)
Total outside United States
605
393
428
Total provision for income taxes
$
1,137
$
951
$
1,209
Required:
a) What was the total amount of income tax due to all jurisdictions during 2017?
b) What was the total amount of income tax payments KrisKraft made to all jurisdictions during 2017?
c) What was the total deferred tax asset or deferred tax liability for 2017? Select whether deferred tax
asset or deferred tax liability in addition to providing the amount.
d) What was the amount of income tax expense that appeared on KrisKraft’s 2017 income statement?
Use the proper title found in the note disclosure for the total amount.
105. Philips Corporation acquired 10,000 shares of common stock of Romo Company on January 1,
2017. The investment cost $120 per share and accounted for 5% of Romo’s common stock. Philips
properly classified this minority-passive investment as an investment to be adjusted to fair value. Philips
has substantial income (for both financial reporting and tax purposes) from other sources. The tax rate is
35% for ordinary income as well as capital gain income.
In 2017, Romo earned $10 per share and declared and paid a common dividend of $2 per share. In 2018,
Romo earned $15 per share and declared and paid a common dividend of $2.50 per share. During 2017
and 2018, Romo had no potentially dilutive securities at any time and there were no changes in the
number of shares it had outstanding. Romo’s stock closed trading on December 31, 2017 at $135. It
closed at $128 on December 31, 2018. Dividends are taxable when received. However, for investments in
CHAPTER 13 Income Tax Reporting 230
less than 20% of the stock of another company, 70% of the dividend income may be excluded from
taxable income. That is, only 30% of the dividend is included in taxable income.
Required:
a) What amount of pre-tax book income or loss should Philips report in 2017 related to its investment in
Romo? Select whether income or loss in addition to providing the amount.
b) What amount of income tax expense or tax benefit should Philips report in 2017 as a result of its
investment in Romo? Select whether tax expense or tax benefit in addition to providing the amount.
Also select whether the amount is a current or deferred portion.
c) What amount of pre-tax book income or loss should Philips report in 2018 related to its investment in
Romo? Select whether income or loss in addition to providing the amount.
d) What amount of income tax expense or tax benefit should Philips report in 2018 as a result of its
investment in Romo? Select whether tax expense or tax benefit in addition to providing the amount.
Also select whether the amount is a current or deferred portion.
e) What amount of deferred tax asset or deferred tax liability should Philips report at December 31, 2017
related to its investment in Romo? Select whether deferred tax asset or deferred tax liability in
addition to providing the amount.
f) What amount of deferred tax asset or deferred tax liability should Philips report at December 31, 2018
related to its investment in RomoSelect whether deferred tax asset or deferred tax liability in addition
to providing the amount.
