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P13-7. Tax rate reconciliation schedules for IFRS vs. U.S. GAAP
Note: If the weighted average tax rate or effective rate is rounded before doing
Calculations relevant to both reconciliations:
Country X Country Y Total
(Tax Expense pre-tax book income)
(1) Given in problem.
(2) Sum of pre-tax book income and adjustments.
(3) Tax based on pre-tax book income:
Requirement 1:
US GAAP:
Reconciliation Note
s
Amount
s
Rate
Tax on pre-tax income
Amounts:
(1) 0.28 * pre-tax income = .28 * $2,350,000 = $658,000
(2) Tax effect depends on relevant tax rate in country where income is tax-exempt:
(3) Tax effect depends on relevant tax rate in country where expenses are not
deductible:
(4) Difference between sum of amounts (1), (2) and (3) and total income tax
expense. It can also be calculated directly as follows:
Pre-tax book income in Country Y *
(Difference in tax rates between Country Y and Country X) =
Rates: Adjustments to the statutory rate of 28% are calculated by dividing the amount
of each adjustment by pre-tax book income.
Requirement 2:
IFRS:
Reconciliation Notes Amounts Rates
Tax based on
weighted average
Amounts:
(1) See table above for calculation of total tax on pre-tax book income and
weighted-average statutory tax rate.
(2) and (3) See computations (2) and (3) under Requirement 1.
(3) See calculation of income tax expense in table above.
Rates: Adjustments to the weighted average statutory rate are calculated by
dividing the amount of each adjustment by pre-tax book income.
Note that the only difference between the two reconciliations (Requirement 1
vs. Requirement 2) is that under IFRS the reconciliation begins with the tax at
the weighted-average statutory rate ($735,000, Requirement 2), whereas under
P13-8. Converting book income to taxable income and computation of taxes
due
Requirement 1:
The calculation of Madison Corporation’s taxable income for 2017 is as follows:
Requirement 2:
Taxes due for 2017 $ 36 ,400
Journal entry (not required):
D
The changes in deferred tax asset amounts are shown with each of the related
temporary differences shown in the reconciliation of pretax book income and
taxable income in Requirement 1. Deferred tax assets increase by $8,750 and
decrease by $23,100, for a net decrease of $14,350. Deferred tax liabilities
P13-9 Calculating taxes due, deferred taxes, and tax expense
Requirement 1:
Requirement 2:
Requirement 3:
Income tax expense = Taxes due + Increase in deferred tax liability –
Increase in deferred tax asset
Because the tax rate did not change and there are no permanent differences,
P13-10. Converting from taxable income to book income
Requirement 1:
Pretax book income can be determined by constructing the reconciliation
between pretax book income and taxable income. Taxable income is given
($98,000), so once the permanent and temporary differences are entered into
Requirement 2:
Temporary difference
Requirement 3:
Because there is no change in the tax rate, income tax expense can also be
P13-11. Making entries for uncertain tax positions
Requirement 1:
At the end of 2017, the recognition threshold was met (i.e., the likelihood of
sustaining the position based on its technical merits was greater than 50%).
So, Phillips recorded its tax provision assuming the position would be
sustained, but also recorded a liability to reduce the recognized benefit to the
largest amount that is cumulatively greater than 50% likely of being realized.
----------------
Requirement 2:
At the end of 2018, the recognition threshold is no longer met, so Phillips must have a
contingency reserve for the entire $350 uncertain tax benefit. There is already a $200
P13-12. Making entries for uncertain tax positions
Requirement 1:
The 2017 income tax provision and taxes payable are reduced by $1,500 x
35% = $525 to reflect the deduction of the expenditure. However, because the
probability of sustaining the uncertain tax position on its technical merits is less
than 50%, the benefit may not be recognized. The following journal entry
reverses the tax benefit of the portion of the expenditure not currently
However, the expenditure is deductible over time, so the following journal entry records the
deferred tax benefit associated with it::
Requirement 2:
Note: $35 = $100 x 35%, where $100 is the amount of annual amortization
permitted under tax law.
P13-13 Comprehensive tax allocation problem
Requirement 1:
Flower Company
Calculation of Taxable Income and Taxes Due
Computation of Taxable Income:
Adjustments for Temporary Differences:
3For tax purposes, one-half of the cash has been collected, therefore one-half
of the profit is recognized. The remaining profit will be recognized in 2018 when
the cash is collected.
Requirement 2:
Computation of change in deferred tax asset and deferred tax liability accounts:
Deferred Deferred
Temporary Difference Tax Asset Tax
Liability
Depreciation
Rent income recognized in income
statement in 2017, taxed in 2018,
Tax benefit of loss carryforward used,
Requirement 3:
Determination of tax expense for 2017:
Tax expense = Taxes due + Increase in deferred tax liability +
Decrease in deferred tax asset
Because the tax rate does not change, tax expense can also be computed as
P13-14. Determining taxes due, deferred taxes, and tax expense
Requirement 1:
Reality Corp.
Calculation of Taxable Income and Taxes Due
Computation of Taxable Income:
Adjustments for temporary differences:
Excess of tax depreciation over book depreciation
($225,000 - $100,000)
Excess of equity in investee earnings over dividends
Received, less portion considered permanent due to
80% dividend exclusion rule [20% x ($80,000 - $30,000)]
Taxable income before use of operating loss carryforward
29,000
Operating loss carryforward used
(10,000)
Taxable income
Taxes due
$6,650
Requirement 2:
Computation of change in deferred tax asset and deferred tax liability
accounts
Deferred Tax
Deferred Tax
Temporary Difference Asset Liability
$54,250 CR
Requirement 3: Determination of Tax Expense for 2017
Tax Expense = Taxes Due + Increase in Deferred Tax Liability - Increase in
Deferred Tax Asset (including effect of increase in valuation
= $56,700
*Increase in valuation allowance:
Because the tax rate did not change, income tax expense is also equal to
