CHAPTER 19
ACCOUNTING FOR INCOME TAXES
CHAPTER LEARNING OBJECTIVES
1. Describe the fundamentals of accounting for income taxes.
2. Identify additional issues in accounting for income taxes.
3. Explain the accounting for loss carrybacks and loss carryforwards.
4. Describe the presentation of deferred income taxes in financial statements.
*5. Apply the concepts and procedures of interperiod tax allocation.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 2
TRUE-FALSE—Conceptual
1. Taxable income is a tax accounting term and is also referred to as income before taxes.
2. Pretax financial income is the amount used to compute income tax payable.
3. Taxable amounts increase taxable income in future years.
4. A deferred tax liability represents the increase in taxes payable in future years as a result
of taxable temporary differences existing at the end of the current year.
5. Deductible amounts cause taxable income to be greater than pretax financial income in
the future as a result of existing temporary differences.
6. A deferred tax asset represents the increase in taxes refundable in future years as a result
of deductible temporary differences existing at the end of the current year.
7. A company reduces a deferred tax asset if it is possible that it will not realize some portion
of the deferred tax asset.
8. Companies should consider both positive and negative evidence to determine whether,
based on the weight of available evidence, it needs adjust the deferred tax asset.
9. A company should add a decrease in a deferred tax liability to income tax payable in
computing income tax expense.
10. Taxable temporary differences will result in taxable amounts in future years when the
related assets are recovered.
11. Examples of taxable temporary differences are subscriptions received in advance and
advance rental receipts.
12. Permanent differences do not give rise to future taxable or deductible amounts.
13. Companies must consider presently enacted changes in the tax rate that become effective
in future years when determining the tax rate to apply to existing temporary differences.
14. When a change in the tax rate is enacted, the effect is reported as an adjustment to
income tax payable in the period of the change.
15. Under the loss carryback approach, companies must apply a current year loss to the most
recent year first and then to an earlier year.
16. The tax effect of a loss carryforward represents future tax savings and results in the
recognition of a deferred tax asset.
17. A possible source of taxable income that may be available to realize a tax benefit for loss
carryforwards is existing taxable temporary differences.
18. An individual deferred tax asset or liability is classified as current or non-current based on
the classification of the related asset/liability for financial reporting purposes.
Accounting for Income Taxes
19 – 3
19. Companies classify the balances in the deferred tax accounts on the statement of
financial position as non-current assets or non-current liabilities.
20. The IASB believes that the deferred tax method is the most consistent method for
accounting for income taxes.
True-False Answers—Conceptual
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MULTIPLE CHOICE—Conceptual
21. Taxable income of a corporation
a. differs from accounting income due to differences in intraperiod allocation between
the two methods of income determination.
b. differs from accounting income due to differences in interperiod allocation and
permanent differences between the two methods of income determination.
c. is based on international financial reporting standards.
d. is reported on the corporation’s income statement.
22 Taxable income of a corporation differs from pretax financial income because of
Permanent Temporary
Differences Differences
a. No No
b. No Yes
c. Yes Yes
d. Yes No
23. The deferred tax expense is the
a. increase in balance of deferred tax asset minus the increase in balance of deferred tax
liability.
b. increase in balance of deferred tax liability minus the increase in balance of deferred
tax asset.
c. increase in balance of deferred tax asset plus the increase in balance of deferred tax
liability.
d. decrease in balance of deferred tax asset minus the increase in balance of deferred
tax liability.
24. Each of the following is determined according to IFRS except
a. income before taxes.
b. taxable income.
c. income for financial reporting purposes.
d. income for book purposes.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 4
25. An assumption inherent in a company’s IFRS statement of financial position is that
companies recover and settle the assets and liabilities at
a. the amount that is probable where “probable” means a level of likelihood of at least
more than 50%.
b. the present value of future cash flows.
c. their reported amounts.
d. their net realizable value.
26. Machinery was acquired at the beginning of the year. Depreciation recorded during the life
of the machinery could result in
Future Future
Taxable Amounts Deductible Amounts
a. Yes Yes
b. Yes No
c. No Yes
d. No No
P27. A temporary difference arises when a revenue item is reported for tax purposes in a
period
After it is reported Before it is reported
in financial income in financial income
a. Yes Yes
b. Yes No
c. No Yes
d. No No
28. Under IFRS
a. “probable” is defined as a level of likelihood of at least slightly more than 60%.
b. a company should reduce a deferred tax asset when it’s likely that some or all of it will
not be recognized.
c. a company considers only positive evidence when determining whether to recognize a
deferred tax asset.
d. deferred tax assets must be evaluated at the end of each accounting period.
29. Which of the following statements is correct regarding deferred taxes under IFRS?
a. Income tax payable plus or minus the change in deferred income taxes equals income
tax expense.
b. The current portion of income tax expense is the amount of change in deferred taxes
related to the current period.
c. In computing income tax expense, a company deducts an increase in a deferred tax
liability to income tax payable.
d. All of the choices are correct.
S30. At the December 31, 2018 statement of financial position date, Unruh Corporation reports
an accrued receivable for financial reporting purposes but not for tax purposes. When this
asset is recovered in 2019, a future taxable amount will occur and
a. pretax financial income will exceed taxable income in 2019.
b. Unruh will record a decrease in a deferred tax liability in 2019.
c. total income tax expense for 2019 will exceed current tax expense for 2019.
d. Unruh will record an increase in a deferred tax asset in 2019.
Accounting for Income Taxes
19 – 5
P31. Assuming a 40% statutory tax rate applies to all years involved, which of the following
situations will give rise to reporting a deferred tax liability on the balance sheet?
I. A revenue is deferred for financial reporting purposes but not for tax purposes.
II. A revenue is deferred for tax purposes but not for financial reporting purposes.
III. An expense is deferred for financial reporting purposes but not for tax purposes.
IV. An expense is deferred for tax purposes but not for financial reporting purposes.
a. item II only
b. items I and II only
c. items II and III only
d. items I and IV only
S32. A major distinction between temporary and permanent differences is
a. permanent differences are not representative of acceptable accounting practice.
b. temporary differences occur frequently, whereas permanent differences occur only
once.
c. once an item is determined to be a temporary difference, it maintains that status;
however, a permanent difference can change in status with the passage of time.
d. temporary differences reverse themselves in subsequent accounting periods, whereas
permanent differences do not reverse.
S33. Which of the following are temporary differences that are normally classified as expenses
or losses that are deductible after they are recognized in financial income?
a. Advance rental receipts.
b. Product warranty liabilities.
c. Depreciable property.
d. Fines and expenses resulting from a violation of law.
S34. Which of the following is a temporary difference classified as a revenue or gain that is
taxable after it is recognized in financial income?
a. Subscriptions received in advance.
b. Prepaid royalty received in advance.
c. Sales accounted for on the accrual basis for financial reporting purposes and on the
installment (cash) basis for tax purposes.
d. Interest received on government obligations.
S35. Which of the following differences would result in future taxable amounts?
a. Expenses or losses that are tax deductible after they are recognized in financial
income.
b. Revenues or gains that are taxable before they are recognized in financial income.
c. Revenues or gains that are recognized in financial income but are never included in
taxable income.
d. Expenses or losses that are tax deductible before they are recognized in financial
income.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 6
36. Stuart Corporation’s taxable income differed from its accounting income computed for this
past year. An item that would create a permanent difference in accounting and taxable
incomes for Stuart would be
a. a balance in the Unearned Rent account at year end.
b. using accelerated depreciation for tax purposes and straight-line depreciation for book
purposes.
c. a fine resulting from violations of environmental regulations.
d. making installment sales during the year.
37. An example of a permanent difference is
a. fines resulting from a violation of law.
b. interest expense on money borrowed to invest in government bonds.
c. percentage depletion of natural resources.
d. All of these answer choices are correct.
38. Which of the following will not result in a temporary difference?
a. Product warranty liabilities
b. Advance rental receipts
c. Gain on involuntary conversion of non-monetary asset.
d. All of these answer choices will result in a temporary difference.
39. A company uses the equity method to account for an investment. This would result in
what type of difference and in what type of deferred income tax?
Type of Difference Deferred Tax
a. Permanent Asset
b. Permanent Liability
c. Temporary Asset
d. Temporary Liability
40. A company records an unrealized loss on short-term securities. This would result in what
type of difference and in what type of deferred income tax?
Type of Difference Deferred Tax
a. Temporary Liability
b. Temporary Asset
c. Permanent Liability
d. Permanent Asset
41. Which of the following temporary differences results in a deferred tax asset in the year the
temporary difference originates?
I. Accrual for product warranty liability.
II. Subscriptions received in advance.
III. Prepaid insurance expense.
a. I and II only.
b. II only.
c. III only.
d. I and III only.
Accounting for Income Taxes
19 – 7
42. Which of the following is not considered a permanent difference?
a. Interest received on government obligations.
b. Fines resulting from violating the law.
c. Percentage depletion of natural resources.
d. Stock-based compensation expense.
43. Which of the following statements is correct regarding permanent differences under IFRS?
a. Permanent differences result from items that enter into pretax financial income but
never into taxable income.
b. Permanent differences result from items that enter into taxable income but never into
pretax financial income.
c. Permanent differences affect only the period in which they occur.
d. All of these answer choices are correct.
44. Under IFRS when a change in the tax rates is enacted
I. Companies should record its effect on existing deferred tax accounts immediately.
II. Companies report the effect of changes in tax rates on deferred tax accounts in
the period the new rate becomes effective.
III. Companies report the effect of changes in tax rates on deferred tax accounts that
arise in future periods when the new tax rates are in effect.
a. I Only.
b. II Only.
c. III Only.
d. Either I, II, or III, depending on how frequently tax rates change in the company’s tax
jurisdiction.
S45. When a change in the tax rate is enacted into law, its effect on existing deferred income
tax accounts should be
a. handled retroactively in accordance with the guidance related to changes in
accounting standards.
b. considered, but it should only be recorded in the accounts if it reduces a deferred tax
liability or increases a deferred tax asset.
c. reported as an adjustment to tax expense in the period of change.
d. applied to all temporary or permanent differences that arise prior to the date of the
enactment of the tax rate change, but not subsequent to the date of the change.
46. Tax rates other than the current tax rate may be used to calculate the deferred income tax
amount on the statement of financial position if
a. it is probable that a future tax rate change will occur.
b. it appears likely that a future tax rate will be greater than the current tax rate.
c. the future tax rates have been enacted or substantially enacted.
d. it appears likely that a future tax rate will be less than the current tax rate.
47. Recognition of tax benefits in the loss year due to a loss carryforward requires
a. the establishment of a deferred tax liability.
b. the establishment of a deferred tax asset.
c. the establishment of an income tax refund receivable.
d. only a note to the financial statements.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 8
48. In determining whether to adjust a deferred tax asset, a company should
a. consider all positive and negative information in determining the need for an
adjustment.
b. consider only the positive information in determining the need for an adjustment.
c. take an aggressive approach in its tax planning.
d. pass a recognition threshold, after assuming that it will be audited by taxing
authorities.
49. Under IFRS deferred tax assets are recognized for
I. Deductible temporary differences.
II. Deductible permanent differences.
III. Operating loss carryforwards.
IV. Operating loss carrybacks.
a. I, II, and III.
b. I and III only.
c. I and IV only.
d. II and III only.
50. Under IFRS companies are required to provide a reconciliation between actual tax
expense and the applicable tax rate. The purpose(s) of this reconciliation include
I. Making better prediction of future cash flow.
II. Predicating future cash flows for operating loss carryforwards.
III. Assessing the composition of the net deferred income tax liability.
IV. Assessing quality of earnings.
a. I, III, and IV only.
b. I, II and IV only.
c. I and IV only.
d. I, II, III and IV.
51. Major reason(s) for disclosure of deferred income tax information is (are)
a. better assessment of quality of earnings.
b. better predictions of future cash flows.
c. that it may be helpful in predicating future cash flows for operating loss carryforwards.
d. All of these answer choices are correct.
52. Accounting for income taxes can result in the reporting of deferred taxes as any of the
following except
a. a current or non-current asset.
b. a current or non-current liability.
c. a contra-asset account.
d. All of these answer choices are acceptable methods of reporting deferred taxes.
53. Deferred taxes should be presented on the statement of financial position
a. as one net debit or credit amount.
b. as a net amount in the non-current section.
c. in two amounts: one for the net debit amount and one for the net credit amount.
d. as reductions of the related asset or liability accounts.
Accounting for Income Taxes
19 – 9
54. Tanner, Inc. incurred a financial and taxable loss for 2016. Tanner therefore decided to
use the carryback provisions as it had been profitable up to this year. How should the
amounts related to the carryback be reported in the 2016 financial statements?
a. The reduction of the loss should be reported as a prior period adjustment.
b. The refund claimed should be reported as a deferred charge and amortized over five
years.
c. The refund claimed should be reported as revenue in the current year.
d. The refund claimed should be shown as a reduction of the loss in 2016.
S55. Companies allocate income tax expense (or benefit) to all of the following except
a. discontinued operations.
b. prior period adjustments.
c. gross profit.
d. other comprehensive income.
56. All of the following are procedures for the computation of deferred income taxes except to
a. identify the types and amounts of existing temporary differences and carryforwards.
b. measure the deferred tax liability for taxable temporary differences.
c. measure the deferred tax asset for deductible temporary differences and loss
carrybacks.
d. All of these answer choices are procedures in computing deferred income taxes.
57. The IASB believes that the __________________ method is the most consistent method
for accounting for income taxes.
a. Asset-liability.
b. Income statement.
c. Statement of financial position.
d. Revenue-expense.
58. The IASB believes that the asset-liability method is the most consistent method for
accounting for income taxes. Basic principles of this method include
I. A current tax liability or asset is recognized for the estimated taxes payable or
refundable on the tax return for the current year.
II. A deferred tax liability or asset is recognized for the estimated future tax effects
attributable to temporary differences and carryforwards.
III. The measurement of current and deferred tax liabilities and assets, is based on
provisions of the enacted tax law.
IV. The measurement of deferred tax assets is reduced, if necessary, by the amount
of any tax benefits that, based on available evidence, are not expected to be
realized.
a. I, II and only.
b. II and III only.
c. I, II, and IV only.
d. I, II, III and IV.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 10
59. Which of the following statements is incorrect with regards to IFRS and U.S. GAAP?
a. With regard to uncertain tax positions, under IFRS, all potential liabilities must be
recognized.
b. The tax effects related to certain items are reported in equity under U.S. GAAP, under
IFRS the tax effects are charged or credited to income.
c. U.S. GAAP uses an impairment approach for deferred tax assets. The deferred tax
asset is recognized in full and reduced by a valuation account if it is more likely than
not all or a portion of the deferred tax asset will not be realized.
d. U.S. GAAP classifies deferred taxes based on the classification of the assets or
liability to which it relates.
60. Which of the following statements is correct with regards to IFRS and U.S. GAAP?
a. Under U.S. GAAP, all potential liabilities related to uncertain tax positions must be
recognized.
b. The tax effects related to certain items are reported under U.S. GAAP; under IFRS the
tax effects are charged or credited to income.
c. IFRS uses an affirmative judgment approach for deferred tax assets, whereas U.S.
GAAP uses an impairment approach for deferred tax assets.
d. IFRS classifies deferred taxes based on classification of the asset or liability to which it
relates.
Multiple Choice Answers—Conceptual
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Accounting for Income Taxes
19 – 11
MULTIPLE CHOICE—Computational
Use the following information for questions 61 and 62.
At the beginning of 2019, Pitman Co. purchased an asset for €600,000 with an estimated useful
life of 5 years and an estimated residual value of €50,000. For financial reporting purposes the
asset is being depreciated using the straight-line method; for tax purposes the double-declining-
balance method is being used. Pitman Co.’s tax rate is 40% for 2019 and all future years.
61. At the end of 2019, what is the book basis and the tax basis of the asset?
Book basis Tax basis
a. €440,000 €310,000
b. €490,000 €310,000
c. €490,000 €360,000
d. €440,000 €360,000
62. At the end of 2019, which of the following deferred tax accounts and balances is reported
on Pitman’s statement of financial position?
Account _ Balance
a. Deferred tax asset €52,000
b. Deferred tax liability €52,000
c. Deferred tax asset €78,000
d. Deferred tax liability €78,000
63. Lehman Corporation purchased a machine on January 2, 2017, for £2,000,000. The
machine has an estimated 5-year life with no residual value. The straight-line method of
depreciation is being used for financial statement purposes and the following accelerated
depreciation amounts will be deducted for tax purposes:
2017 £400,000 2020 £230,000
2018 640,000 2021 230,000
2019 384,000 2022 116,000
Assuming an income tax rate of 30% for all years, the net deferred tax liability that should
be reflected on Lehman’s statement of financial position at December 31, 2018, should be
Deferred Tax Liability
Current Noncurrent
a. £0 £72,000
b. £4,800 £67,200
c. £67,200 £4,800
d. £72,000 £0
Use the following information for questions 64 and 65.
Mathis Co. at the end of 2018, its first year of operations, prepared a reconciliation between
pretax financial income and taxable income as follows:
Pretax financial income € 500,000
Estimated litigation expense 1,250,000
Installment sales (1,000,000)
Taxable income € 750,000
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 12
The estimated litigation expense of €1,250,000 will be deductible in 2020 when it is expected to
be paid. The gross profit from the installment sales will be realized in the amount of €500,000 in
each of the next two years. The estimated liability for litigation is classified as non-current and the
installment accounts receivable are classified as €500,000 current and €500,000 noncurrent. The
income tax rate is 30% for all years.
64. The income tax expense is
a. €150,000.
b. €225,000.
c. €250,000.
d. €500,000.
65. The net deferred tax asset to be recognized is
a. €75,000.
b. €150,000.
c. €375,000.
d. €225,000.
Use the following information for questions 66 and 77.
Hopkins Co. at the end of 2018, its first year of operations, prepared a reconciliation between
pretax financial income and taxable income as follows:
Pretax financial income € 750,000
Estimated litigation expense 1,000,000
Extra depreciation for taxes (1,500,000)
Taxable income € 250,000
The estimated litigation expense of €1,000,000 will be deductible in 2019 when it is expected to
be paid. Use of the depreciable assets will result in taxable amounts of €500,000 in each of the
next three years. The income tax rate is 30% for all years.
66. Income taxes payable is
a. €0.
b. €75,000.
c. €150,000.
d. €225,000.
67. The net deferred tax liability to be recognized is
a. €750,000.
b. €450,000.
c. €300,000.
d. €150,000.
Accounting for Income Taxes
19 – 13
68. Eckert Corporation’s partial income statement after its first year of operations is as follows:
Income before income taxes £3,750,000
Income tax expense
Current £1,035,000
Deferred 90,000 1,125,000
Net income £2,625,000
Eckert uses the straight-line method of depreciation for financial reporting purposes and
accelerated depreciation for tax purposes. The amount charged to depreciation expense
on its books this year was £1,500,000. No other differences existed between book income
and taxable income except for the amount of depreciation. Assuming a 30% tax rate, what
amount was deducted for depreciation on the corporation’s tax return for the current year?
a. £1,200,000
b. £1,425,000
c. £1,500,000
d. £1,800,000
69. Cross Company reported the following results for the year ended December 31, 2018, its
first year of operations:
2018
Income (per books before income taxes) € 750,000
Taxable income 1,200,000
The disparity between book income and taxable income is attributable to a temporary
difference which will reverse in 2019. What should Cross record as a net deferred tax
asset or liability for the year ended December 31, 2018, assuming that the enacted tax
rates in effect are 40% in 2018 and 35% in 2019?
a. €180,000 deferred tax liability
b. €157,500 deferred tax asset
c. €180,000 deferred tax asset
d. €157,500 deferred tax liability
70. In 2018, Krause Company accrued, for financial statement reporting, estimated losses on
disposal of unused plant facilities of €1,500,000. The facilities were sold in March 2019
and a €1,500,000 loss was recognized for tax purposes. Also in 2018, Krause paid
€100,000 in fines for violation of environmental regulations. Assuming that the enacted tax
rate is 30% in both 2018 and 2019, and that Krause paid €780,000 in income taxes in
2018, the amount reported as net deferred income taxes on Krause’s statement of
financial position at December 31, 2018, should be a
a. €420,000 asset.
b. €360,000 asset.
c. €360,000 liability.
d. €450,000 asset.
71. Stephens Company has a deductible temporary difference of €2,000,000 at the end of its
first year of operations. Its tax rate is 40 percent. Stephens has €1,800,000 of income
taxes payable. After a careful review of all available evidence, Stephens determines that it
is probable that it will not realize €200,000 of this deferred tax asset. On Stephens
Company’s statement of financial position at the end of its first year of operations, what is
the amount of deferred tax asset?
a. €2,000,000
b. €1,800,000
c. €800,000
d. €720,000
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 14
72. Stephens Company has a deductible temporary difference of €2,000,000 at the end of its
first year of operations. Its tax rate is 40 percent. Stephens has €1,800,000 of income
taxes payable. At the end of the first year, after a careful review of all available evidence,
Stephens determines that it is probable that it will not realize €200,000 of this deferred tax
asset. At the end of the second year of operations, Stephens Company determines that it
expects to realize €1,850,000 of this deferred tax assets. On Stephens Company’s
statement of financial position at the end of its second year of operations, what is the
amount of deferred tax asset?
a. €800,000.
b. €740,000.
c. €60,000.
d. €720,000
73. Link Sink Manufacturing has a deferred tax asset account with a balance of £300,000 at
the end of 2018 due to a single cumulative temporary difference of £750,000. At the end
of 2019, this same temporary difference has increased to a cumulative amount of
£1,000,000. Taxable income for 2019 is £1,700,000. The tax rate is 40% for all years.
Assuming it’s probable that 70% of the deferred tax asset will be realized, what amount
will be reported on Link Sink’s statement of financial position for the deferred tax asset at
December 31, 2019?
a. £400,000.
b. £280,000.
c. £700,000.
d. £680,000.
74. Stephens Company has a deductible temporary difference of €2,000,000 at the end of its
first year of operations. Its tax rate is 40 percent. Stephens has €1,800,000 of income
taxes payable. At the end of the first year, after a careful review of all available evidence,
Stephens determines that it is probable that it will not realize €200,000 of this deferred tax
asset. At the end of the second year of operations, Stephens Company determines that it
expects to realize €1,850,000 of this deferred tax assets. On Stephens Company’s
income statement for the second year, what amount of income tax expense will it report
related to the temporary difference, and is the amount a debit or credit?
a. €40,000 credit.
b. €40,000 debit.
c. €20,000 debit.
d. €20,000 credit.
75. Link Sink Manufacturing has a deferred tax asset account with a balance of £300,000 at
the end of 2018 due to a single cumulative temporary difference of £750,000. At the end
of 2019, this same temporary difference has increased to a cumulative amount of
£1,000,000. Taxable income for 2019 is £1,700,000. The tax rate is 40% for 2019, but
enacted tax rates for all future years are 35%. Assuming it’s probable that 70% of the
deferred tax asset will be realized, what amount will be reported on Link Sink’s statement
of financial position for the deferred tax asset at December 31, 2019?
a. £262,500.
b. £280,000.
c. £245,000.
d. £595,000.
Accounting for Income Taxes
19 – 15
76. Watson Corporation prepared the following reconciliation for its first year of operations:
Pretax financial income for 2019 €1,200,000
Tax exempt interest (100,000)
Originating temporary difference (300,000)
Taxable income €800,000
The temporary difference will reverse evenly over the next two years at an enacted tax
rate of 40%. The enacted tax rate for 2019 is 28%. What amount should be reported in its
2019 income statement as the current portion of its provision for income taxes?
a. €224,000
b. €320,000
c. €336,000
d. €480,000
Use the following information for questions 77 and 78.
Mitchell Corporation prepared the following reconciliation for its first year of operations:
Pretax financial income for 2019 € 900,000
Tax exempt interest (75,000)
Originating temporary difference (225,000)
Taxable income €600,000
The temporary difference will reverse evenly over the next two years at an enacted tax rate of
40%. The enacted tax rate for 2019 is 35%.
77. What amount should be reported in its 2019 income statement as the deferred portion of
income tax expense?
a. €90,000 debit
b. €120,000 debit
c. €90,000 credit
d. €105,000 credit
78. In Mitchell’s 2019 income statement, what amount should be reported for total income tax
expense?
a. €330,000
b. €315,000
c. €300,000
d. €210,000
79. Ferguson Company has the following cumulative taxable temporary differences:
12/31/19 12/31/18
£1,350,000 £960,000
The tax rate enacted for 2019 is 40%, while the tax rate enacted for future years is 30%.
Taxable income for 2019 is £2,400,000 and there are no permanent differences.
Ferguson’s pretax financial income for 2019 is
a. £3,750,000.
b. £2,790,000.
c. £2,010,000.
d. £1,050,000.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 16
Use the following information for questions 80 through 82.
Lyons Company deducts insurance expense of €84,000 for tax purposes in 2018, but the
expense is not yet recognized for accounting purposes. In 2019, 2020, and 2021, no insurance
expense will be deducted for tax purposes, but €28,000 of insurance expense will be reported for
accounting purposes in each of these years. Lyons Company has a tax rate of 40% and income
taxes payable of €72,000 at the end of 2018. There were no deferred taxes at the beginning of
2018.
80. What is the amount of the deferred tax liability at the end of 2018?
a. €33,600
b. €28,800
c. €12,000
d. €0
81. What is the amount of income tax expense for 2018?
a. €105,600
b. €100,800
c. €84,000
d. €72,000
82. Assuming that income taxes payable for 2019 is $96,000, the income tax expense for
2019 would be what amount?
a. €129,600
b. €107,200
c. €96,000
d. €84,800
Use the following information for questions 83 and 84.
Kraft Company made the following journal entry in late 2018 for rent on property it leases to
Danford Corporation.
Cash 60,000
Unearned Rent Revenue 60,000
The payment represents rent for the years 2019 and 2020, the period covered by the lease. Kraft
Company is a cash basis taxpayer. Kraft has income tax payable of €92,000 at the end of 2018,
and its tax rate is 35%.
83. What amount of income tax expense should Kraft Company report at the end of 2018?
a. €53,000
b. €71,000
c. €81,500
d. €113,000
84. Assuming the income taxes payable at the end of 2019 is $102,000, what amount of
income tax expense would Kraft Company record for 2019?
a. €81,000
b. €91,500
c. €112,500
d. €123,000
Accounting for Income Taxes
19 – 17
85. The following information is available for Kessler Company after its first year of
operations:
Income before taxes £250,000
Federal income tax payable £104,000
Deferred income tax (4,000)
Income tax expense 100,000
Net income £150,000
Kessler estimates its annual warranty expense as a percentage of sales. The amount
charged to warranty expense on its books was £95,000. Assuming a 40% income tax rate,
what amount was actually paid this year for warranty claims?
a. £105,000
b. £100,000
c. £95,000
d. £85,000
Use the following information for questions 86–88.
At the beginning of 2018; Elephant, Inc. had a deferred tax asset of €4,000 and a deferred tax
liability of €6,000. Pre-tax accounting income for 2018 was €300,000 and the enacted tax rate is
40%. The following items are included in Elephant’s pre-tax income:
Interest income from government obligations
€24,000
Accrued warranty costs, estimated to be
paid in 2019
€52,000
Operating loss carryforward
€38,000
Installment sales revenue, will be collected
in 2019
€26,000
Prepaid rent expense, will be used in 2019
€12,000
86. What is Elephant, Inc.’s taxable income for 2018?
a. €300,000
b. €252,000
c. €348,000
d. €452,000
87. Which of the following is required to adjust Elephant, Inc.’s deferred tax asset to its correct
balance at December 31, 2018?
a. A debit of €20,800
b. A credit of €15,200
c. A debit of €15,200
d. A debit of €16,800
88. The ending balance in Elephant, Inc’s deferred tax liability at December 31, 2018 is
a. €9,200
b. €15,200
c. €10,400
d. €31,200
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 18
Use the following information for questions 89 and 90.
Rowen, Inc. had pre-tax accounting income of €900,000 and a tax rate of 40% in 2018, its first
year of operations. During 2018 the company had the following transactions:
Received rent from Jane, Co. for 2019
€32,000
Government bonds interest income
€40,000
Depreciation for tax purposes in excess of book
depreciation
€20,000
Installment sales revenue to be collected in
2019
€54,000
89. For 2018, what is the amount of income taxes payable for Rowen, Inc?
a. €301,600
b. €327,200
c. €343,200`
d. €386,400
90. At the end of 2018, which of the following deferred tax accounts and balances is reported
on Rowen, Inc.’s statement of financial position?
Account _ Balance
a. Deferred tax asset €12,800
b. Deferred tax liability €12,800
c. Deferred tax asset €20,800
d. Deferred tax liability €20,800
91. Based on the following information, compute 2019 taxable income for South Co. assuming
that its pre-tax accounting income for the year ended December 31, 2019 is €230,000.
Future taxable
Temporary difference (deductible) amount
Installment sales
€192,000
Depreciation
€60,000
Unearned rent
(€200,000)
a. €282,000
b. €178,000
c. €482,000
d. €222,000
92. Fleming Company has the following cumulative taxable temporary differences:
12/31/19 12/31/18
£640,000 £900,000
The tax rate enacted for 2019 is 40%, while the tax rate enacted for future years is 30%.
Taxable income for 2019 is £1,600,000 and there are no permanent differences.
Fleming’s pretax financial income for 2019 is:
a. £960,000
b. £1,340,000
c. £1,730,000
d. £2,240,000
Accounting for Income Taxes
19 – 19
93. Larsen Corporation reported €100,000 in revenues in its 2018 financial statements, of
which €44,000 will not be included in the tax return until 2019. The enacted tax rate is
40% for 2018 and 35% for 2019. What amount should Larsen report for deferred tax
liability in its statement of financial position at December 31, 2018?
a. €15,400
b. €17,600
c. €19,600
d. €22,400
94. Duncan Inc. uses the accrual method of accounting for financial reporting purposes and
appropriately uses the installment (cash) basis of accounting for income tax purposes.
Profits of €300,000 recognized for books in 2018 will be collected in the following years:
Collection of Profits
2019 € 50,000
2020 €100,000
2021 €150,000
The enacted tax rates are: 40% for 2018, 35% for 2019, and 30% for 2020 and 2021.
Taxable income is expected in all future years. What amount should be included in the
December 31, 2018, statement of financial position for the deferred tax liability related to
the above temporary difference?
a. €17,500
b. €75,000
c. €92,500
d. €120,000
95. At December 31, 2018 Raymond Corporation reported a deferred tax liability of €90,000
which was attributable to a taxable temporary difference of €300,000. The temporary
difference is scheduled to reverse in 2022. During 2019, a new tax law increased the
corporate tax rate from 30% to 40%. Raymond should record this change by debiting
a. Retained Earnings for €30,000.
b. Retained Earnings for €9,000.
c. Income Tax Expense for €9,000.
d. Income Tax Expense for €30,000.
96. Palmer Co. had a deferred tax liability balance due to a temporary difference at the
beginning of 2018 related to €600,000 of excess depreciation. In December of 2018, a
new income tax act is signed into law that lowers the corporate rate from 40% to 35%,
effective January 1, 2020. If taxable amounts related to the temporary difference are
scheduled to be reversed by €300,000 for both 2019 and 2020, Palmer should increase or
decrease deferred tax liability by what amount?
a. Decrease by €30,000
b. Decrease by €15,000
c. Increase by €15,000
d. Increase by €30,000
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 20
97. A reconciliation of Gentry Company’s pretax accounting income with its taxable income for
2018, its first year of operations, is as follows:
Pretax accounting income £3,000,000
Excess tax depreciation (90,000)
Taxable income £2,910,000
The excess tax depreciation will result in equal net taxable amounts in each of the next
three years. Enacted tax rates are 40% in 2018, 35% in 2019 and 2020, and 30% in 2021.
The total deferred tax liability to be reported on Gentry’s statement of financial position at
December 31, 2018, is
a. £36,000.
b. £30,000.
c. £31,500.
d. £27,000.
98. Khan, Inc. reports a taxable and financial loss of €650,000 for 2020. Its pretax financial
income for the last two years was as follows:
2018 €300,000
2019 400,000
The amount that Khan, Inc. reports as a net loss for financial reporting purposes in 2020,
assuming that it uses the carryback provisions, and that the tax rate is 30% for all periods
affected, is
a. €650,000 loss.
b. € -0-.
c. €195,000 loss.
d. €455,000 loss.
Use the following information for questions 99 and 100.
Wilcox Corporation reported the following results for its first three years of operation:
2018 income (before income taxes) € 100,000
2019 loss (before income taxes) (900,000)
2020 income (before income taxes) 1,000,000
There were no permanent or temporary differences during these three years. Assume a corporate
tax rate of 30% for 2018 and 2019, and 40% for 2020.
99. Assuming that Wilcox elects to use the carryback provision, what net income (loss) is
reported in 2019? (Assume that any deferred tax asset recognized is probable to be
realized.)
a. € (900,000)
b. € -0-
c. € (870,000)
d. € (550,000)
Accounting for Income Taxes
19 – 21
100. Assuming that Wilcox elects to use the carryforward provision and not the carryback
provision, what net income (loss) is reported in 2019?
a. € (900,000)
b. € (540,000)
c. € -0-
d. € (870,000)
101. Rodd Co. reports a taxable and pretax financial loss of €400,000 for 2020. Rodd’s taxable
and pretax financial income and tax rates for the last two years were:
2018 €400,000 30%
2019 400,000 35%
The amount that Rodd should report as an income tax refund receivable in 2020,
assuming that it uses the carryback provisions and that the tax rate is 40% in 2020, is
a. €120,000.
b. €140,000.
c. €160,000.
d. €180,000.
102. Nickerson Corporation began operations in 2018. There have been no permanent or
temporary differences to account for since the inception of the business. The following
data are available:
Year
2018
2019
2020
2021
Enacted Tax Rate
45%
40%
35%
30%
Taxable Income
£750,000
900,000
Taxes Paid
£337,500
360,000
In 2020, Nickerson had an operating loss of £930,000. What amount of income tax
benefits should be reported on the 2020 income statement due to this loss?
a. £409,500
b. £373,500
c. £372,000
d. £279,000
Use the following information for questions 103 and 104.
Operating income and tax rates for C.J. Company’s first three years of operations were as
follows: Income _ Enacted tax rate
2018 €100,000 35%
2019 (€250,000) 30%
2020 €420,000 40%
103. Assuming that C.J. Company opts to carryback its 2019 NOL, what is the amount of
income taxes payable at December 31, 2020?
a. €68,000
b. €168,000
c. €123,000
d. €108,000
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 22
104. Assuming that C.J. Company opts only to carryforward its 2019 NOL, what is the amount
of deferred tax asset or liability that C.J. Company would report on its December 31, 2019
balance sheet?
Amount _ Deferred tax asset or liability
a. €75,000 Deferred tax liability
b. €87,500Deferred tax liability
c. €100,000 Deferred tax asset
d. €75,000 Deferred tax asset
105. Georgia, Inc. has no temporary or permanent differences. The company experiences the
following:
Year
Taxable income/loss
Tax rate
Tax paid
2018
€ 100,000
35%
€ 35,000
2019
200,000
30%
60,000
2020
400,000
40%
160,000
2021
(500,000)
—-
-0-
In 2021, Georgia, Inc. decides to carry back its NOL. What amount of income tax refund
receivable will Georgia record for 2021?
a. €200,000
b. €80,000
c. €190,000
d. € -0-
106. Lincoln Company has the following four deferred tax items at December 31, 2019. The
deferred tax assets and the deferred tax liabilities relate to income taxes levied by the
same tax authority. On Lincoln’s December 31, 2019 statement of financial position, it will
report
Temporary Difference
Deferred Tax
Asset
Deferred Tax
Liability
Rent collected in advance: recognized when
earned for accounting purposes and when
received for tax purposes
€84,000
Use of straight-line depreciation for accounting
purposes and accelerated depreciation for tax
purposes
€428,000
Recognition of profits on installment sales during
period of sale for accounting purposes and
during period of collection for tax purposes
90,000
Warranty liabilities: recognized for accounting
purposes at time of sale; for tax purposes at
time paid
24,000
a. €108,000 current deferred tax asset.
b. €626,000 non-current deferred tax liability.
Accounting for Income Taxes
19 – 23
c. €410,000 non-current deferred tax liability.
d. €518,000 current tax payable.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 24
107. Lincoln Company has the following four deferred tax items at December 31, 2019. The
deferred tax assets and the deferred tax liabilities relate to income taxes levied by the
same tax authority. On Lincoln’s December 31, 2019 statement of financial position, it will
report
Temporary Difference
Deferred Tax
Asset
Deferred Tax
Liability
Rent collected in advance: recognized when
earned for accounting purposes and when
received for tax purposes
£652,000
Use of straight-line depreciation for accounting
purposes and accelerated depreciation for tax
purposes
£330,000
Recognition of profits on installment sales during
period of sale for accounting purposes and
during period of collection for tax purposes
64,000
Warranty liabilities: recognized for accounting
purposes at time of sale; for tax purposes at
time paid
37,000
a. £394,000 current deferred tax liability.
b. £689,000 current deferred tax asset.
c. £295,000 non-current deferred tax asset.
c. £394,000 current tax receivable.
Multiple Choice Answers—Computational
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Item
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Item
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Item
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Item
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Item
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Item
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Accounting for Income Taxes
19 – 25
MULTIPLE CHOICE—CPA Adapted
108. Munoz Corp.’s books showed pretax financial income of €1,500,000 for the year ended
December 31, 2019. In the computation of income taxes, the following data were
considered:
Gain on an involuntary conversion €650,000
(Munoz has elected to replace the property within the statutory
period using total proceeds.)
Depreciation deducted for tax purposes in excess of depreciation
deducted for book purposes 100,000
Estimated tax payments, 2019 125,000
Enacted tax rate, 2019 30%
What amount should Munoz report as its current income tax liability on its December 31,
2019 statement of financial position?
a. €100,000
b. €130,000
c. €225,000
d. €255,000
109. Haag Corp.’s 2019 income statement showed pretax accounting income of €750,000. To
compute the income tax liability, the following 2019 data are provided:
Income from government bonds € 30,000
Depreciation deducted for tax purposes in excess of depreciation
deducted for financial statement purposes 60,000
Estimated income tax payments made 150,000
Enacted corporate income tax rate 30%
What amount of current income tax liability should be included in Hagg’s December 31,
2019 statement of financial position?
a. €48,000
b. €66,000
c. €75,000
d. €198,000
110. On January 1, 2019, Gore, Inc. purchased a machine for €720,000 which will be
depreciated €72,000 per year for financial statement reporting purposes. For income tax
reporting, Gore elected to expense €80,000 and to use straight-line depreciation which
will allow a depreciation deduction of €64,000 for 2019. Assume a present and future
enacted income tax rate of 30%. What amount should be added to Gore’s deferred tax
liability for this temporary difference at December 31, 2019?
a. €43,200
b. €24,000
c. €21,600
d. €19,200
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 26
111. On January 1, 2019, Piper Corp. purchased 40% of the voting common stock of Betz, Inc.
and appropriately accounts for its investment by the equity method. During 2019, Betz
reported earnings of €360,000 and paid dividends of €120,000. Piper assumes that all of
Betz’s undistributed earnings will be distributed as dividends in future periods when the
enacted tax rate will be 30%. Ignore the dividend-received deduction. Piper’s current
enacted income tax rate is 25%. The increase in Piper‘s deferred income tax liability for
this temporary difference is
a. €72,000.
b. €60,000.
c. €43,200.
d. €28,800.
112. Foltz Corp.‘s 2018 income statement had pretax financial income of £250,000 in its first
year of operations. Foltz uses an accelerated depreciation method on its tax return and
straight-line depreciation for financial reporting. The differences between the book and tax
deductions for depreciation over the five-year life of the assets acquired in 2014, and the
enacted tax rates for 2018 to 2022 are as follows:
Book Over (Under) Tax Tax Rates
2018 £ (50,000) 35%
2019 (65,000) 30%
2020 (15,000) 30%
2021 60,000 30%
2022 70,000 30%
There are no other temporary differences. In Foltz’s December 31, 2018 statement of
financial position, the non-current deferred tax liability and the income taxes currently
payable should be
Non-current Deferred Income Taxes
Tax Liability Currently Payable
a. £39,000 £50,000
b. £39,000 £70,000
c. £15,000 £60,000
d. £15,000 £70,000
113. Didde Corp. prepared the following reconciliation of income per books with income per tax
return for the year ended December 31, 2019:
Book income before income taxes €1,200,000
Add temporary difference
Construction contract revenue which will reverse in 2020 160,000
Deduct temporary difference
Depreciation expense which will reverse in equal amounts in
each of the next four years (640,000)
Taxable income €720,000
Didde‘s effective income tax rate is 34% for 2019. What amount should Didde report in its
2019 income statement as the current provision for income taxes?
a. €54,400
b. €244,800
c. €408,000
d. €462,400
Accounting for Income Taxes
19 – 27
114. In its 2018 income statement, Cohen Corp. reported depreciation of €1,110,000 and interest
revenue on government obligations of €210,000. Cohen reported depreciation of
€1,650,000 on its 2018 income tax return. The difference in depreciation is the only
temporary difference, and it will reverse equally over the next three years. Cohen‘s enacted
income tax rates are 35% for 2018, 30% for 2019, and 25% for 2020 and 2021. What
amount should be included in the deferred income tax liability in Hertz’s December 31, 2018
statement of financial position?
a. €144,000
b. €186,000
c. €225,000
d. €262,500
115. Dunn, Inc. uses the accrual method of accounting for financial reporting purposes and
appropriately uses the installment (cash) method of accounting for income tax purposes.
Installment income of €900,000 will be collected in the following years when the enacted
tax rates are:
Collection of Income Enacted Tax Rates
2018 € 90,000 35%
2019 180,000 30%
2020 270,000 30%
2021 360,000 25%
The installment income is Dunn’s only temporary difference. What amount should be
included in the deferred income tax liability in Dunn’s December 31, 2018 statement of
financial position?
a. €225,000
b. €256,500
c. €283,500
d. €315,000
116. For calendar year 2018, Kane Corp. reported depreciation of €1,200,000 in its income
statement. On its 2018 income tax return, Kane reported depreciation of €1,800,000.
Kane’s income statement also included €225,000 accrued warranty expense that will be
deducted for tax purposes when paid. Kane’s enacted tax rates are 30% for 2018 and
2019, and 24% for 2020 and 2021. The depreciation difference and warranty expense will
reverse over the next three years as follows:
Depreciation Difference Warranty Expense
2019 €240,000 € 45,000
2020 210,000 75,000
2021 150,000 105,000
€600,000 €225,000
These were Kane’s only temporary differences. In Kane‘s 2018 income statement, the
deferred portion of its provision for income taxes should be
a. €200,700.
b. €112,500.
c. €101,700.
d. €109,800.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 28
117. Wright Co., organized on January 2, 2018, had pretax accounting income of £880,000 and
taxable income of £1,600,000 for the year ended December 31, 2010 The only temporary
difference is accrued product warranty costs which are expected to be paid as follows:
2019 £240,000
2020 120,000
2021 120,000
2022 240,000
The enacted income tax rates are 35% for 2018, 30% for 2019 through 2021, and 25% for
2022. If Wright expects taxable income in future years, the deferred tax asset in Wright’s
December 31, 2018 statement of financial position should be
a. £144,000.
b. £168,000.
c. £204,000.
d. £252,000.
Multiple Choice Answers—CPA Adapted
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DERIVATIONS — Computational
No. Answer Derivation
Accounting for Income Taxes
19 – 29
DERIVATIONS — Computational (cont.)
No. Answer Derivation
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 30
DERIVATIONS — Computational (cont.)
No. Answer Derivation
DERIVATIONS — CPA Adapted
No. Answer Derivation
Accounting for Income Taxes
19 – 31
DERIVATIONS — CPA Adapted (cont.)
No. Answer Derivation
EXERCISES
Ex. 19-118—Computation of taxable income.
The records for Bosch Co. show this data for 2019:
• Gross profit on installment sales recorded on the books was €360,000. Gross profit for tax
purposes from collections of installment receivables was €270,000.
• Machinery was acquired in January for €300,000. Straight-line depreciation over a ten-year
life (no residual value) is used. For tax purposes, Accelerated depreciation is used and Bosch
may deduct 20% for 2019.
• Interest received on governmental obligations was €9,000.
• The estimated warranty liability related to 2019 sales was €19,600. Repair costs under
warranties during 2019 were €13,600. The remainder will be incurred in 2020.
• Pretax financial income is €600,000. The tax rate is 30%.
Instructions
(a) Prepare a schedule starting with pretax financial income and compute taxable income.
(b) Prepare the journal entry to record income taxes for 2019.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 32
Solution 19-118
Ex. 19–119—Future taxable and deductible amounts.
Define temporary differences, future taxable amounts, and future deductible amounts.
Solution 19–119
Ex. 19–120—Deferred income taxes.
Pole Co. at the end of 2018, its first year of operations, prepared a reconciliation between pretax
financial income and taxable income as follows:
Pretax financial income € 420,000
Extra depreciation taken for tax purposes (1,050,000)
Estimated expenses deductible for taxes when paid 840,000
Taxable income € 210,000
Use of the depreciable assets will result in taxable amounts of €350,000 in each of the next three
years. The estimated litigation expenses of €840,000 will be deductible in 2021 when settlement
is expected.
Instructions
(a) Prepare a schedule of future taxable and deductible amounts.
Accounting for Income Taxes
19 – 33
(b) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes
payable for 2018, assuming a tax rate of 40% for all years.
Ex. 19–121—Deferred income taxes.
Hunt Co. at the end of 2018, its first year of operations, prepared a reconciliation between pretax
financial income and taxable income as follows:
Pretax financial income € 750,000
Estimated expenses deductible for taxes when paid 1,200,000
Extra depreciation (1,350,000)
Taxable income € 600,000
Estimated warranty expense of €800,000 will be deductible in 2019, €300,000 in 2020, and
€100,000 in 2021. The use of the depreciable assets will result in taxable amounts of €450,000 in
each of the next three years.
Instructions
(a) Prepare a table of future taxable and deductible amounts.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income
taxes payable for 2018, assuming an income tax rate of 40% for all years.
Solution 19–121
Ex. 19-122—Recognition of deferred tax asset.
(a) Describe a deferred tax asset.
(b) When is it not appropriate to recognize a portion or all of a deferred tax asset?
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 34
Solution 19–122
Ex. 19–123—Permanent and temporary differences.
Listed below are items that are treated differently for accounting purposes than they are for tax
purposes. Indicate whether the items are permanent differences or temporary differences. For
temporary differences, indicate whether they will create deferred tax assets or deferred tax
liabilities.
1. Investments accounted for under the equity method.
2. Advance rental receipts.
3. Fine for polluting.
4. Estimated future warranty costs.
5. Excess of contributions over pension expense.
6. Expenses incurred in obtaining tax-exempt income.
7. Litigation accruals.
8. Excess tax depreciation over accounting depreciation.
9. Long-term construction contracts.
10. Percentage depletion of natural resources in excess of their cost.
Solution 19–123
Accounting for Income Taxes
19 – 35
Ex. 19–124—Permanent and temporary differences.
Indicate and explain whether each of the following independent situations should be treated as a
temporary difference or a permanent difference.
(a) For accounting purposes, a company reports revenue from installment sales on the accrual
basis. For income tax purposes, it reports the revenues by the installment method, deferring
recognition of gross profit until cash is collected.
(b) Pretax accounting income and taxable income differ because dividends received from other
corporations was deducted from taxable income, while all of the dividends received was
reported for financial statement purposes.
(c) Estimated warranty costs (covering a three-year warranty) are expensed for accounting
purposes at the time of sale but deducted for income tax purposes when paid.
Solution 19–124
Ex. 19–125—Temporary differences.
There are four types of temporary differences. For each type: (1) indicate the cause of the
difference, (2) give an example, and (3) indicate whether it will create a taxable or deductible
amount in the future.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 36
Solution 19–125
Ex. 19–126—NOL Carryback and Carryforward, Recognition versus Non-Recognition
Lindemax Inc. reports the following pretax income (loss) for both financial reporting purposes and
tax purposes. (Assume the carryback provision is used for a net operating loss.)
Year Pretax Income (Loss) Tax Rate
2018 £220,000 34%
2019 180,000 34%
2020 (520,000) 38%
2021 440,000 38%
The tax rates listed were all enacted by the beginning of 2018.
Instructions
(a) Prepare the journal entries for the years 2018-2021 to record income tax expense (benefit)
and income tax payable (refundable) and the tax effects of the loss carryback and
carryforward, assuming that the end of 2020 it is probable that the benefits of the loss
carryforward will be realized in the future.
(b) Using the assumption in (a), prepare the income tax section of the 2020 income statement,
beginning with the line “Operating loss before income taxes.”
(c) Prepare the journal entries for 2020 and 2021, assuming that based on the weight of
available evidence, it is probable that one-fourth of the benefits of the loss carryforward will
not be realized.
Accounting for Income Taxes
19 – 37
Solution 19–126
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 38
PROBLEMS
Pr. 19–127—Differences between accounting and taxable income and the effect on deferred
taxes.
The following differences enter into the reconciliation of financial income and taxable income of
Abbott Company for the year ended December 31, 2017, its first year of operations. The enacted
income tax rate is 30% for all years.
Pretax accounting income €700,000
Excess tax depreciation (320,000)
Litigation accrual 70,000
Unearned rent revenue deferred on the books but appropriately
recognized in taxable income 50,000
Interest received on government obligations (20,000)
Taxable income €480,000
1. Excess tax depreciation will reverse equally over a four-year period, 2018-2021.
2. It is estimated that the litigation liability will be paid in 2021.
3. Rent revenue will be recognized during the last year of the lease, 2021.
4. Interest received on government obligations is expected to be $20,000 each year until their
maturity at the end of 2021.
Instructions
(a) Prepare a schedule of future taxable and (deductible) amounts.
(b) Prepare a schedule of the deferred tax (asset) and liability.
(c) Since this is the first year of operations, there is no beginning deferred tax asset or liability.
Compute the net deferred tax expense (benefit).
(d) Prepare the journal entry to record income tax expense, deferred taxes, and the income
taxes payable for 2017.
Solution 19–127
Accounting for Income Taxes
19 – 39
Solution 19–127 (cont.)
Pr. 19–128—Multiple temporary differences.
The following information is available for the first three years of operations for Cooper Company:
1. Year Taxable Income
2018 €500,000
2019 330,000
2020 400,000
2. On January 2, 2018, heavy equipment costing €600,000 was purchased. The equipment had
a life of 5 years and no residual value. The straight-line method of depreciation is used for
book purposes and the tax depreciation taken each year is listed below:
Tax Depreciation
2018 2019 2020 2021 Total
€198,000 €270,000 €90,000 €42,000 €600,000
3. On January 2, 2019, €240,000 was collected in advance for rental of a building for a three–
year period. The entire €240,000 was reported as taxable income in 2019, but €160,000 of
the €240,000 was reported as unearned revenue at December 31, 2019 for book purposes.
4. The enacted tax rates are 40% for all years.
Instructions
(a) Prepare a schedule comparing depreciation for financial reporting and tax purposes.
(b) Determine the deferred tax (asset) or liability at the end of 2018.
(c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2019.
(d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2019.
(e) Compute the net deferred tax expense (benefit) for 2019.
(f) Prepare the journal entry to record income tax expense, deferred income taxes, and income
taxes payable for 2019.
Solution 19–128
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 40
Solution 19–128 (cont.)
Pr. 19-129—Deferred tax asset.
Farmer Inc. began business on January 1, 2018. Its pretax financial income for the first 2 years
was as follows:
2018 €240,000
2019 560,000
The following items caused the only differences between pretax financial income and taxable
income.
Accounting for Income Taxes
19 – 41
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 42
Pr. 19-129 (cont.)
1. In 2018, the company collected €180,000 of rent; of this amount, €60,000 was earned in
2018; the other €120,000 will be earned equally over the 2019–2020 period. The full
€180,000 was included in taxable income in 2018.
2. The company pays a €10,000 fine for pollution.
3. In 2019, the company terminated a top executive and agreed to €90,000 of severance pay.
The amount will be paid €30,000 per year for 2019–2021. The 2019 payment was made. The
€90,000 was expensed in 2019. For tax purposes, the severance pay is deductible as it is
paid.
The enacted tax rates existing at December 31, 2018 are:
2018 30% 2020 40%
2019 35% 2021 40%
Instructions
(a) Determine taxable income for 2018 and 2019.
(b) Determine the deferred income taxes at the end of 2018, and prepare the journal entry to
record income taxes for 2018.
(c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2019.
(d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2019.
(e) Compute the net deferred tax expense (benefit) for 2019.
(f) Prepare the journal entry to record income taxes for 2019.
Solution 19-129
Accounting for Income Taxes
19 – 43
Solution 19-129 (cont.)
Pr. 19–130—Interperiod tax allocation with change in enacted tax rates.
Murphy Company purchased equipment for £180,000 on January 2, 2018, its first day of
operations. For book purposes, the equipment will be depreciated using the straight-line method
over three years with no salvage value. Pretax financial income and taxable income are as
follows:
2018 2019 2020
Pretax financial income £224,000 £260,000 £300,000
Taxable income 200,000 260,000 324,000
The temporary difference between pretax financial income and taxable income is due to the use
of accelerated depreciation for tax purposes.
Instructions
(a) Prepare the journal entries to record income taxes for all three years (expense, deferrals,
and liabilities) assuming that the enacted tax rate applicable to all three years is 30%.
(b) Prepare the journal entries to record income taxes for all three years (expense, deferrals,
and liabilities) assuming that the enacted tax rate as of 2018 is 30% but that in the middle of
2019, the taxing authority raises the income tax rate to 35% retroactive to the beginning of
2019.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
19 – 44
Solution 19–130