Test Bank for Intermediate Accounting, Fifteenth Edition
19 – 34
Accounting for Income Taxes
19 – 35
Solution 19-108 (cont.)
Ex. 19-109—Recognition of deferred tax asset.
(a) Describe a deferred tax asset.
(b) When should a deferred tax asset be reduced by a valuation allowance?
Solution 19-109
Ex. 19-110—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 by 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 revenue.
7. Installment sales.
8. Excess tax depreciation over accounting depreciation.
9. Long-term construction contracts.
10. Premiums paid on life insurance of officers (company is the beneficiary).
Solution 19-110
Test Bank for Intermediate Accounting, Fifteenth Edition
19 – 36
Ex. 19-111—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-sales method,
deferring recognition of gross profit until cash is collected.
(b) Pretax accounting income and taxable income differ because 80% of dividends received
from U.S. corporations was deducted from taxable income, while 100% 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 19-111
Ex. 19-112—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.
Accounting for Income Taxes
19 – 37
Solution 19-112
Ex. 19-113—Operating loss carryforward.
In 2014, its first year of operations, Kimble Corp. has a $800,000 net operating loss when the tax
rate is 30%. In 2015, Kimble has $350,000 taxable income and the tax rate remains 30%.
Instructions
Assume the management of Kimble Corp. thinks that it is more likely than not that the loss
carryforward will not be realized in the near future because it is a new company (this is before
results of 2015 operations are known).
(a) What are the entries in 2014 to record the tax effects of the loss carryforward?
(b) What entries would be made in 2015 to record the current and deferred income taxes and to
recognize the loss carryforward? (Assume that at the end of 2013 it is more likely than not
that the deferred tax asset will be realized.)
Solution 19-113
Test Bank for Intermediate Accounting, Fifteenth Edition
19 – 38
PROBLEMS
Pr. 19-114—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, 2014, its first year of operations. The enacted
income tax rate is 30% for all years.
Pretax accounting income $700,000
Excess tax depreciation (360,000)
Litigation accrual 70,000
Unearned rent revenue deferred on the books but appropriately
recognized in taxable income 60,000
Interest income from New York municipal bonds (20,000)
Taxable income $450,000
1. Excess tax depreciation will reverse equally over a four-year period, 2015-2018.
2. It is estimated that the litigation liability will be paid in 2018.
3. Rent revenue will be recognized during the last year of the lease, 2018.
4. Interest revenue from the New York bonds is expected to be $20,000 each year until their
maturity at the end of 2018.
Instructions
(a) Prepare a schedule of future taxable and (deductible) amounts.
(b) Prepare a schedule of the deferred tax (asset) and liability at the end of 2014.
(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 2014.
Solution 19-114
Accounting for Income Taxes
19 – 39
Solution 19-114 (cont.)
Pr. 19-115—Multiple temporary differences.
The following information is available for the first three years of operations for Cooper Company:
1. Year Taxable Income
2014 $500,000
2015 350,000
2016 400,000
2. On January 2, 2014, heavy equipment costing $600,000 was purchased. The equipment had
a life of 5 years and no salvage value. The straight-line method of depreciation is used for
book purposes and the tax depreciation taken each year is listed below:
Tax Depreciation
2014 2015 2016 2017 Total
$198,000 $270,000 $90,000 $42,000 $600,000
3. On January 2, 2015, $300,000 was collected in advance for rental of a building for a three-
year period. The entire $300,000 was reported as taxable income in 2015, but $200,000 of
the $300,000 was reported as unearned revenue at December 31, 2015 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 2014.
(c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2015.
(d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2015.
(e) Compute the net deferred tax expense (benefit) for 2015.
(f) Prepare the journal entry to record income tax expense, deferred income taxes, and income
tax payable for 2015.
Solution 19-115
Test Bank for Intermediate Accounting, Fifteenth Edition
19 – 40
Solution 19-115 (cont.)
Pr. 19–116—Deferred tax asset.
Farmer Inc. began business on January 1, 2014. Its pretax financial income for the first 2 years
was as follows:
2014 $240,000
2015 560,000
The following items caused the only differences between pretax financial income and taxable
income.
Accounting for Income Taxes
19 – 41
Pr. 19-116 (cont.)
1. In 2014, the company collected $360,000 of rent; of this amount, $120,000 was earned in
2014; the other $240,000 will be earned equally over the 2015–2016 period. The full
$360,000 was included in taxable income in 2014.
2. The company pays $10,000 a year for life insurance on officers.
3. In 2015, the company terminated a top executive and agreed to $90,000 of severance pay.
The amount will be paid $30,000 per year for 2015–2017. The 2015 payment was made. The
$90,000 was expensed in 2015. For tax purposes, the severance pay is deductible as it is
paid.
The enacted tax rates existing at December 31, 2014 are:
2014 30% 2016 40%
2015 35% 2017 40%
Instructions
(a) Determine taxable income for 2014 and 2015.
(b) Determine the deferred income taxes at the end of 2014, and prepare the journal entry to
record income taxes for 2014.
(c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2015.
(d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2015.
(e) Compute the net deferred tax expense (benefit) for 2015.
(f) Prepare the journal entry to record income taxes for 2015.
(g) Show how the deferred income taxes should be reported on the balance sheet at December
31, 2015.
Solution 19-116
Test Bank for Intermediate Accounting, Fifteenth Edition
19 – 42
Solution 19-116 (cont.)
Pr. 19-117—Interperiod tax allocation with change in enacted tax rates.
Murphy Company purchased equipment for $300,000 on January 2, 2014, 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:
2014 2015 2016
Pretax financial income $224,000 $260,000 $300,000
Taxable income 194,000 260,000 330,000
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 2014 is 30% but that in the middle of
2015, Congress raises the income tax rate to 35% retroactive to the beginning of 2015.
Accounting for Income Taxes
19 – 43
Solution 19-117
Test Bank for Intermediate Accounting, Fifteenth Edition
19 – 44
IFRS QUESTIONS
True/False Questions
1. Under IFRS an affirmative judgment approach is used for recognizing deferred tax assets up
to the amount that is probable to be realized.
2. Under U.S. GAAP, the rate used to compute deferred taxes is either the enacted tax rate, or a
substantially enacted tax rate (virtually certain).
3. Under IFRS, a deferred tax liability is classified as current or noncurrent based on the
classification of the asset or liability to which it relates.
4. Under IFRS, all tax effects are charged or credited to income.
5. Under IFRS, all potential liabilities associated with uncertain tax positions are recognized.
Answers to True/False:
Multiple Choice Questions
6. Which of the following is false regarding accounting for deferred taxes under IFRS?
a. A deferred tax liability is classified as current or noncurrent based on the classification
of the asset or liability to which it relates.
b. A deferred tax asset is recognized up to the amount that is probable to be realized.
c. Tax effects of certain items are recognized in equity.
d. The rate used to compute deferred taxes is either the enacted tax rate, or a
substantially enacted tax rate (virtually certain).
7. Jerome Co. has the following deferred tax liabilities at December 31, 2014:
Amount
Related to
$100,000
Installment sales, expected to be collected in 2015
$350,000
Fixed asset, 10-year remaining useful life, 2014 tax depreciation exceeds
book depreciation
$90,000
Prepaid insurance related to 2015
What amount would Jerome Co. report as a noncurrent deferred tax liability under IFRS and
under U.S. GAAP?
IFRS U.S. GAAP
a. $0 $450,000
b. $540,000 $350,000
c. $350,000 $350,000
d. $540,000 $540,000
Accounting for Income Taxes
19 – 45
8. With regard to recognition of deferred tax assets, IFRS requires
Approach
Recognition
a.
Affirmative judgment
Recognize an asset up to the amount that is probable
to be realized
b.
Impairment approach
Recognize asset in full, reduced by valuation
allowance if it’s more likely than not that all or a
portion of the asset won’t be realized
c.
Affirmative judgment
Recognize asset in full, reduced by valuation
allowance if it’s more likely than not that all or a
portion of the asset won’t be realized
d.
Impairment approach
Recognize an asset up to the amount that is probable
to be realized
9. Match the approach, IFRS or U.S. GAAP, with the location where tax effects are reported:
Location
a.
Charge or credit only taxable temporary differences to income
b.
Charge or credit certain tax effects to equity
c.
Charge or credit certain tax effects to equity
d.
Charge or credit only deductible temporary differences to
income
10. Alice, Inc. has the following deferred tax assets at December 31, 2014:
Amount
Related to
$180,000
Rent revenue collected in advance related to 2015
$75,000
Warranty liability, expected to be paid in 2015
$255,000
Accrued liability related to a lawsuit expected to settle in 2018
What amount would Alice, Inc. report as a current deferred tax asset under IFRS and under
U.S. GAAP?
_IFRS_ U.S. GAAP
a $510,000 $510,000
b. $0 $255,000
c. $255,000 $510,000
d. $510,000 $255,000
Answers to Multiple Choice:
Test Bank for Intermediate Accounting, Fifteenth Edition
19 – 46
Short Answer:
11. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS
with respect to income tax accounting.
12. Describe the current convergence efforts of the FASB and IASB in the area of accounting
for taxes.