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E13-17. Computing tax due, deferred taxes, and tax expense
Requirement 1:
The calculation of tax due for 2017 is as follows:
Requirement 2:
Changes in deferred taxes for 2017:
Temporary difference
Requirement 3:
Calculation of income tax expense for 2017:
Income tax expense = Taxes due for year + Increase in deferred
tax
Because there is no change in the tax rate, income tax expense can
E13-18. Determining tax benefit for uncertain tax position
Case 1 Case 2 Case 3
Management’s assessment of the likelihood of the
uncertain tax position being sustained based on
Note that in case 2, the likelihood of Collins sustaining the position
Financial Reporting and Analysis (7th Ed.)
Chapter 13 Solutions
Income Tax Reporting
Problems
Problems
P13-1. Calculating deferred tax amounts
(AICPA adapted)
P13-2. Calculating the amount of temporary and permanent
differences and tax entry
Requirement 1:
Calculation of temporary difference:
Because tax expense per books is greater than taxes due for the
year, taxable income is lower than book income.
Requirement 2:
Calculation of permanent difference:
Let X = Pre-tax book income (excluding permanent difference)
Book income will be lower than taxable income because of this
permanent difference.
Requirement 3:
Journal entry to record tax expense for year:
Requirement 4:
The effective tax rate is higher than the statutory tax rate of 35%
P13-3. Reporting deferred tax amount on income statement
(AICPA adapted)
Journal entry to record taxes for 2017 (not required):
P13-4. Computing tax expense and making deferred tax calculations
Requirement 1:
Requirement 2:
A permanent difference item is a revenue or expense that is
recognized for book purposes but never for tax purposes or
A goodwill impairment charge is an example of a permanent
Temporary differences are revenue or expense items that are
recognized in a different period for book purposes than for tax
An example of a temporary difference for Nelson is the use of
sum-of-years’-digits depreciation for tax purposes and straight-line
Requirement 3:
*Because the tax rate did not change, this approach to determining
income tax expense is equivalent to summing the change in the
Requirement 4:
Note that even though there was no temporary difference arising or
reversing in 2018, the change in the deferred tax liability resulting
from the change in the income tax rate results in a deferred income
tax provision of –$750.
P13-5. Determining current and deferred portion of tax expense and
reconciling statutory and effective tax rates
All dollar amounts are in thousands.
Requirement 1:
Requirement 2:
The deferred tax assets and liabilities arising in 2017 will reverse in
future periods when the enacted tax rate will be 40%. Therefore, the
Increase in deferred tax liabilities (relating to temporary differences
giving rise to future taxable amounts):
Increase in deferred tax assets (relating to temporary differences
giving rise to future deductible amounts):
Requirement 3:
Tax expense = Taxes due + Increase in deferred tax liability -
Requirement 4:
Reconciliation of statutory and effective tax rates (amounts):
Percenta
ge
of
Pre-Tax
Amount Inco
me
Expected tax expense at statutory rate
P13-6. Tax effects of differences between IFRS and U.S. GAAP related
to impairment charges
All amounts are rounded to the nearest $1.
Requirement 1:
The depreciable cost of the asset is $6,100,000 – $1,100,000 =
$5,000,000. Using straight-line depreciation and a 25-year life gives
The tax basis at December 31, 2018 is $3,130,635, as shown in the
following table:
Year
Beginning
Tax Basis Rate
Tax
Depreciation
Ending
Tax Basis
Note: DDB depreciation rate = 2 x (1/25) = 8%. Because the
amount of depreciation expense in 2018 using the double-declining
Requirement 2:
In 2018, Dolan had tax depreciation of $272,229 (see table in
Requirement 1) versus $200,000 of book depreciation. Because
Note that this amount explains the increase in the deferred tax
liability from December 31, 2017 to December 31, 2018. At any
point in time the deferred tax liability is equal to the cumulative
Requirement 3:
First Dolan must determine whether there is an impairment as of
December 31, 2018. Under U.S. GAAP, an impairment exists if the
book value of the asset exceeds the asset’s undiscounted future
Dolan had $8,200,000 of income before depreciation and taxes in
2018 (given). Tax depreciation was $272,229 (see table in
Income tax expense was computed as the sum of the income tax
due for the year and the increase in the deferred tax liability.
However, note that because there was no change in the income tax
Requirement 4:
First Dolan must determine whether there is an impairment as of
December 31, 2018. Under IFRS, an impairment exists if the book
value exceeds the greater of the fair value (net of cost to sell) or the
value in use. The fair value is $4,300,000 and the cost to sell is
The impairment loss reduces book income but there is no related
income tax deduction in the current period, so there is a temporary
difference. The temporary difference will reverse when DC
Taxable income in 2018 is the same as determined in Requirement
3, resulting in the same income tax due of $2,774,720. The
As a result, income tax expense is lower than in the U.S. GAAP
DR Income tax expense $2,715,300
