Chapter 16 Accounting for Income Taxes
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.
134. The following information is for James Industries’ first year of operations. Amounts are in
millions of dollars.
Year
Future Taxable Amounts
2015
2016
2017
2018
2019
Accounting income
$60
Temporary difference:
Advance rent payment
(12
)
$ 3
$ 3
$ 3
$ 3
Taxable income
$ 48
In 2016 the company’s pretax accounting income was $67. The enacted tax rate for 2015 and
2016 is 40%, and it is 35% for years after 2016.
Required:
Prepare a journal entry to record the income tax expense for the year 2016. Show well-labeled
computations for income tax payable and the change in the deferred tax account.
Chapter 16 Accounting for Income Taxes
Use the following to answer 135 and 136:
Typical Corp. reported a deferred tax liability of $6,000,000 for the year ended December 31, 2015,
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 2015. The temporary difference is expected to reverse in
2017 when the income deferred from taxation will become taxable. There are no other temporary
differences. Assume a new tax law passed in 2016 and the tax rate, which will remain at 40% through
December 31, 2016, will become 48% for tax years beginning after December 31, 2016. Pretax
accounting income and taxable income for the year 2016 is $30,000,000.
135. Required:
Prepare a compound journal entry to record Typical’s income tax expense for the year 2016.
Chapter 16 Accounting for Income Taxes
Show well-labeled computations.
136. Prepare two disclosure notes for Typical’s year 2016 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.
Answer:
Chapter 16 Accounting for Income Taxes
137. 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 2016 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 2018.
Patterson’s pretax accounting income for the 2016 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 2016 income taxes. Show
calculations.
2. What is Patterson’s 2016 net income?
Chapter 16 Accounting for Income Taxes
138. Tobac Company reported an operating loss of $132,000 for financial reporting and tax
purposes in 2016. The enacted tax rate is 40% for 2016 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
2012
$30,000
30%
$9,000
2013
35,000
30%
10,500
2014
42,000
35%
14,700
2015
40,000
40%
16,000
Required:
1.) Prepare a compound journal entry to record Tobac’s tax provision for the year 2016. Show
well-labeled computations.
2.) Compute Tobac’s net loss for 2016.
139. The information that follows pertains to Julia Company:
(a.) Temporary differences for the year 2016 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 2016.
(c.) Pretax accounting income was $67,000 and taxable income was $8,000 for 2016.
(d.) There were no permanent differences.
(e.) The tax rate is 30%.
Required:
Prepare the journal entry to record the tax provision for 2016. Provide supporting
computations.
Chapter 16 Accounting for Income Taxes
140. 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)
50,400,000
Deferred tax asset ($10M x 40%)
Deferred tax liability ($16M x 40%)
Income tax payable ($120M x 40%)
48,000,000
141. Two independent situations are described below. Each involves future deductible amounts
and/or future taxable amounts produced by temporary differences:
SITUATION
1
2
Taxable income
$40,000
$80,000
Amounts at year-end:
Future deductible amounts
5,000
10,000
Future taxable amounts
0
5,000
Balances at beginning of year, dr (cr):
Deferred tax asset
$1,000
$4,000
Deferred tax liability
0
1,000
The enacted tax rate is 40% for both situations.
Required:
For each situation determine the:
(a.) Income tax payable currently.
(b.) Deferred tax asset – balance at year-end.
(c.) Deferred tax asset change dr or (cr) for the year.
(d.) Deferred tax liability – balance at year-end.
(e.) Deferred tax liability change dr or (cr) for the year.
(f.) Income tax expense for the year.
$40,000
$16,000
$15,000
Chapter 16 Accounting for Income Taxes
142. Two independent situations are described below. Each involves future deductible amounts
and/or future taxable amounts produced by temporary differences:
SITUATION
1
2
Taxable income
$100,000
$130,000
Amounts at year-end:
Future deductible amounts
0
10,000
Future taxable amounts
10,000
15,000
Balances at beginning of year:
Deferred tax asset
0
$2,000
Deferred tax liability
2,000
0
The enacted tax rate is 40% for both situations.
Required:
For each situation determine the:
(a.) Income tax payable currently.
(b.) Deferred tax asset – balance at year-end.
(c.) Deferred tax asset change dr or (cr) for the year.
(d.) Deferred tax liability – balance at year-end.
(e.) Deferred tax liability change dr or (cr) for the year.
(f.) Income tax expense for the year.
0
0
no change
Chapter 16 Accounting for Income Taxes
143. Four independent situations are described below. Each involves future deductible amounts
and/or future taxable amounts produced by temporary differences reported first on:
Income Statement
Tax Return
Revenue
Expense
Revenue
Expense
(1.)
$20,000
(2.)
$20,000
(3.)
$15,000
$20,000
(4.)
$15,000
$20,000
$10,000
Required:
For each situation, determine the taxable income assuming pretax accounting income is
$100,000. Show well-labeled computations.
144. Four independent situations are described below. Each involves future deductible amounts
and/or future taxable amounts produced by temporary differences reported first on:
Income Statement
Tax Return
Revenue
Expense
Revenue
Expense
(1.)
$20,000
(2.)
$20,000
(3.)
$20,000
$15,000
(4.)
$15,000
$20,000
$ 5,000
$10,000
Required:
For each situation, determine the taxable income assuming pretax accounting income is
$100,000. Show well-labeled computations.
1
2
3
4
20,000
145. Cabot Company reported a pretax operating loss of $50,000 for financial reporting and tax
purposes in 2016. The enacted tax rate is 40% for 2016 and subsequent years. Assume that
Cabot requests a refund of taxes already paid by electing a loss carryback. 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
2012
$30,000
30%
$9,000
2013
35,000
30%
10,500
2014
42,000
35%
14,700
2015
40,000
40%
16,000
Required:
1.) Prepare the journal entry to record Cabot’s income taxes for the year 2016. Show well-
labeled computations.
2.) Compute Cabot’s net loss for 2016.
(1.)
Receivable income tax refund ($14,700 + 3,200)
Chapter 16 Accounting for Income Taxes
146. Brook Company has taken a position on its tax return to claim a tax credit of $30 million
(direct reduction in taxes payable) and has determined that its sustainability is “more likely
than not” based on its technical merits. Brook’s management has developed the probability
table shown below of all possible material outcomes:
Probability Table ($ in millions)
Amount of the tax benefit that management expects to
receive
$30
$ 24
$ 18
$ 12
$ 6
Percentage likelihood that the tax benefit will be
sustained at this level
10%
20%
25%
20%
25%
Brook’s taxable income is $300 million for the year, and its effective tax rate is 40%. The tax
credit would be a direct reduction in current taxes payable.
Required:
1. At what amount would Brook measure the tax benefit in its income statement?
2. Prepare the appropriate journal entry for Brook to record its income taxes for the year.
Answer:
Chapter 16 Accounting for Income Taxes
Essay
Instructions:
The following answers point out the key phrases that should appear in students’ answers. They are not
intended to be examples of complete student responses. It might be helpful to provide detailed
instructions to students on how brief or in-depth you want their answers to be.
147. What is the justification for a corporation determining income for financial reporting purposes
differently than the way it is determined for tax purposes?
148. What argument serves as the basis for the GAAP requirement that deferred taxes should be
recognized for all temporary differences?
149. Sometimes a temporary difference will produce future deductible amounts. Explain what is
meant by future deductible amounts. Describe at least one situation that has this effect. How
are future deductible amounts recognized in the financial statements?
150. What is a valuation allowance for deferred tax assets and when is it used?
151. Identify three examples of permanent differences between accounting income and taxable
income.
152. What events create permanent differences between accounting income and taxable income?
What effect do these events have on the determination of income taxes payable and deferred
income taxes?
153. When a new tax rate is enacted, what adjustment, if any, is made to the retained earnings
account as a result of the change?
154. Some accountants believe that deferred taxes should not be recognized for certain temporary
differences. What is the conceptual basis for this argument?
155. How are deferred tax assets arising from net operating loss carryforwards classified with
regard to GAAP accounting for income taxes?
156. How are deferred tax assets and deferred tax liabilities reported in a classified balance sheet?
157. The way companies deal with uncertainty in tax positions is prescribed by GAAP in FASB
ASC 740–10: Income Taxes–Overall (previously FASB Interpretation No. 48 (FIN 48)).
Describe the two-step process provided by GAAP (previously FIN 48).
158. What disclosures for deferred taxes, pertaining to the income statement, are required by
GAAP regarding accounting for income taxes?
159. Why are differences in reported amounts for deferred taxes are among the most frequent
between IFRS and U.S. GAAP, despite the fact that the two follow similar approaches for
accounting for taxation?