150) Gore Company, organized on January 2, 2018, had pretax accounting income of $7,000,000
and taxable income of $10,000,000 for the year ended December 31, 2018. The 2018 tax rate
was 40%. The only difference between book and taxable income is estimated warranty costs.
Expected payments and scheduled enacted tax rates are as follows:
2019
$1,000,000
35%
2020
500,000
35%
2021
500,000
35%
2022
1,000,000
30%
Required:
Prepare one compound journal entry to record Gore’s provision for taxes for the year 2018.
Income tax expense (to balance)
Deferred tax asset
(change in deferred tax balance)
Income tax payable (tax currently payable)
Accounting income
$7,000,000
Temp. diff — estimated
warranty expense
$1M
$1M
Taxable income
10,000,000
Enacted tax rate
Tax payable currently
$4,000,000
Deferred tax asset
= $1M
Less: Beginning balance
Change in balance
$1M
Use the following to answer the question(s) below:
In LMC’s 2018 annual report to shareholders, it disclosed the following information about its
income taxes:
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the amounts
of assets and liabilities for accounting purposes and the amounts used for income tax purposes.
Significant components of the Company’s deferred tax liabilities and assets as of December 31
were as follows:
($ in millions)
Deferred tax liabilities:
Property, plant and equipment
Partnership tax basis difference
Other liabilities
Total deferred tax liabilities
Deferred tax assets:
Alternative minimum tax credit
carryforwards
Capital loss carryforwards
Net operating loss carryforwards
Postretirement and postemployment
benefits
Foreign tax credit carryforwards
Reclamation and decommissioning
accruals
Restructuring charges
Other assets
Subtotal
Valuation allowance
Total deferred tax assets
Net deferred tax liabilities
151) Explain why LMC has a $209.4 million valuation allowance for its deferred tax assets.
152) Will LMC report $819.9 million as a liability in its balance sheet at December 31, 2018?
Explain.
153) Indicate why LMC lists net operating loss carryforwards as a component of deferred tax
assets.
154) At the end of the preceding year, World Industries had a deferred tax asset of $17,500,000,
attributable to its only temporary difference of $50,000,000 for estimated expenses. At the end of
the current year, the temporary difference is $45,000,000. At the beginning of the year there was
no valuation account for the deferred tax asset. At year-end, World Industries now estimates that
it is more likely than not that one-third of the deferred tax asset will never be realized. Taxable
income is $12,000,000 for the current year and the tax rate is 30% for all years.
Required:
Prepare journal entries to record World Industries’ income tax expense for the current year. Show
well-labeled supporting computations for each component of the journal entries.
155) At the end of the prior year, Doubtful Inc. had a deferred tax asset of $20,000,000
attributable to its only timing difference, a temporary difference of $50,000,000 in a liability for
estimated expenses. At that time, a valuation allowance of $4,000,000 was established. At the
end of the current year, the temporary difference is $45,000,000, and Doubtful determines that
the balance in the valuation account should now be $5,000,000. Taxable income is $15,000,000
and the tax rate is 40% for all years.
Required:
Prepare journal entries to record Doubtful’s income tax expense for the current year. Show well-
labeled supporting computations for the income tax payable, the valuation allowance, and the
change in the deferred tax asset account.
86
156) The following information is for James Industries’ first year of operations. Amounts are in
millions of dollars.
Future
Year
Future Taxable Amounts
Amounts
2017
2018
2019
2020
2021
Total
Accounting income
$60
Temporary difference:
Advance rent payment
(12)
$ 3
$ 3
$ 3
$ 3
$ 12
Taxable income
$ 48
In 2018 the company’s pretax accounting income was $67. The enacted tax rate for 2017 and
2018 is 40%, and it is 35% for years after 2018.
Required:
Prepare a journal entry to record the income tax expense for the year 2018. Show well-labeled
computations for income tax payable and the change in the deferred tax account.
Use the following to answer the question(s) below:
Typical Corp. reported a deferred tax liability of $6,000,000 for the year ended December 31,
2017, when the tax rate was 40%. The deferred tax liability was related to a temporary difference
of $15,000,000 caused by an installment sale in 2017. The temporary difference is expected to
reverse in 2019 when the income deferred from taxation will become taxable. There are no other
temporary differences. Assume a new tax law passed in 2018 and the tax rate, which will remain
at 40% through December 31, 2018, will become 48% for tax years beginning after December
31, 2018. Pretax accounting income and taxable income for the year 2018 is $30,000,000.
157) Required:
Prepare a compound journal entry to record Typical’s income tax expense for the year 2018.
Show well-labeled computations.
158) Prepare two disclosure notes for Typical’s year 2018 financial statements to:
(a.) Show the composition of Typical’s income tax expense for the year.
(b.) Explain the classification and description of the deferred tax liability.
Give supporting computations to show how you arrived at the dollar amounts disclosed in your
disclosure notes.
90
159) Patterson Development sometimes sells property on an installment basis. In those cases,
Patterson reports income in its income statement in the year of the sale but reports installment
income by the installment method on the tax return. Installment income in 2018 was $120
million, which Patterson expects to collect equally over the next four years. The tax rate is 30%,
but based on an enacted law, is scheduled to become 40% in 2020.
Patterson’s pretax accounting income for the 2018 income statement was $530 million. Of this
amount, $30 million is non-taxable revenue from proceeds of a life insurance policy. There were
no differences between accounting income and taxable income other than those described above
and no cumulative temporary differences existed at the beginning of the year.
Required:
1. Prepare the appropriate journal entry to record Patterson’s 2018 income taxes. Show
calculations.
2. What is Patterson’s 2018 net income?
160) Tobac Company reported an operating loss of $132,000 for financial reporting and tax
purposes in 2018. The enacted tax rate is 40% for 2018 and all future years. Assume that Tobac
elects a loss carryback. No valuation allowance is needed for any deferred tax assets. Taxable
income, tax rates, and income taxes paid in Tobac’s first four years of operations were as
follows:
Taxable
Tax
Taxes
income
rates
paid
2014
$30,000
30%
$9,000
2015
35,000
30%
10,500
2016
42,000
35%
14,700
2017
40,000
40%
16,000
Required:
1.) Prepare a compound journal entry to record Tobac’s tax provision for the year 2018. Show
well-labeled computations.
2.) Compute Tobac’s net loss for 2018.
Receivable income tax refund ($14,700 + $16,000)
30,700
Deferred tax asset (see below)
20,000
Income tax benefit
(to balance)
50,700
Prior years
Current year Future
Operating loss
Loss CB/CF
Tax rates
Tax refund
161) The information that follows pertains to Julia Company:
(a.) Temporary differences for the year 2018 are summarized below.
Expenses deducted in the tax return, but not included in the income statement:
Depreciation $60,000
Prepaid expense 8,000
Expenses reported in the income statement, but not deducted in the tax return:
Warranty expense 9,000
(b.) No temporary differences existed at the beginning of 2018.
(c.) Pretax accounting income was $67,000 and taxable income was $8,000 for 2018.
(d.) There were no permanent differences.
(e.) The tax rate is 30%.
Required:
Prepare the journal entry to record the tax provision for 2018. Provide supporting computations.
162) The information below pertains to Mondavi Corporation:
(a.) For the current year temporary differences existed between the financial statement
carrying amounts and the tax basis of the following:
Carrying
Future Taxable or
Amount
Tax Basis
(Deductible) Amount
Buildings and
equipment
$60,000,000
$45,000,000
$15,000,000
Prepaid insurance
1,000,000
0
1,000,000
Liability-loss
contingency
10,000,000
0
(10,000,000)
(b.) No temporary differences existed at the beginning of the year.
(c.) Pretax accounting income was $300,000,000 and taxable income was $120,000,000 for
the year and the tax rate is 40%.
Required:
Prepare one journal entry to record the tax provision for the current year. Provide supporting
computations.
Income tax expense (to balance)
Deferred tax asset ($10M x 40%)
Deferred tax liability ($16M x 40%)
Income tax payable ($120M x 40%)