Problem 16–11
Requirement 1
Deferred tax assets are recognized for all deductible temporary differences
and operating loss carryforwards. Deferred tax assets are then reduced by a
valuation allowance if it is “more likely than not” that some portion or all of the
deferred tax assets will not be realized. That would be the case if management
feels taxable income will not be sufficient in future years to permit gaining the
Problem 16–11 (concluded)
Requirement 2
The valuation allowance does not preclude Delta from future use of its net
operating loss carryforwards and deferred tax assets. Since Delta has been able to
Requirement 3
Delta reduced its valuation allowance from $10,963 million to $177 million,
for a total reduction of $10,786 million, which represents a decrease of 98.4
percent. That decrease in valuation allowance decreased income tax expense,
Problem 16–12
CPS TRANSPORTATION
Income Tax Expense and Net Income
For the Year Ended December 31, 2018
Requirement 1
Income before income taxes $900,000
Income tax expense:
Calculation:
Deferred income tax expense
Reversal of temporary differences from depreciation
giving rise to future taxable amounts:
2019 $(20,000)
Less:
Dec. 31, 2017, deferred tax liability:
Temporary difference—Depreciation
2018 $60,000
Effective tax rate for years 2018 through 2021 40 %
* Note: Another way to derive this number is by considering what the total temporary difference
is as of year-end 2018. Given that the machine cost $500,000 at Jan. 1, 2017, and there is a
total of $370,000 of MACRS depreciation recognized in 2018–2021, MACRS depreciation in
2017 must have been $130,000, which exceeds straight-line depreciation by $30,000. So, 2017
provided $30,000 of the temporary difference, and 2018 provided $60,000, totaling $90,000.
Problem 16–12 (continued)
Requirement 2
CPS TRANSPORTATION
Calculation of Interest Expense
For the Year Ended December 31, 2018
Capital lease obligation
* The balance at Dec. 31, 2018, would be $73,677. The entries at the
end of 2017 and beginning of 2018 were:
2017 adjusting entry:
Jan. 1, 2018:
Interest payable (10% x $76,061)………. 7,606
Bonds payable
Calculation of bond price:
*Present value of an ordinary annuity of $1: n = 40, i = 5% (from Table 4)
** Present value of $1: n = 40, i = 5% (from Table 2)
Entry to record interest:
……………………….Discount on note payable (difference)
……………………………………………………………………..568
Problem 16–12 (concluded)
Requirement 3
CPS TRANSPORTATION
Long-Term Liabilities Section of Balance Sheet
December 31, 2018
Long-term liabilities:
Lease liability—14 payments of $10,000
due annually on January 1 $73,667
Problem 16–13
Requirement 1
In the tax return, taxable income is reduced by the $15 million interest,
Requirement 2
In the financial statements, none of the tax benefit is recognized because it is
not “more likely than not” that Tru’s position that the interest is not taxable
Requirement 3
The tax benefit from the tax treatment of the plot sales is the ability to defer
paying the tax. Tru is reducing taxable income by the entire $60 million,
effectively deferring the $60 million x 40% = $24 million tax. How much of
Amount Qualifying Percentage Likelihood Cumulative Likelihood
for Installment of Tax Treatment of Tax Treatment
Sales Treatment Being Sustained Being Sustained
$60 20% 20%
The other $8 million isn’t shown as a DTL, but rather is shown as a liability
associated with an uncertain tax position. The timing of the payment of that
Problem 16–13 (continued)
Requirement 4
($ in millions)
Current Future Future
Year Taxable Taxable
2018 Amounts Amounts
2019 2020 [total]
Accounting income 90
Nontemporary difference:
Interest income (15)
Temporary difference:
Deferred Tax Liability
Deferred Tax Liability:
0 Ending balance $24
Journal entry
Income tax expense (to balance) 30
Problem 16–13 (concluded)
Requirement 5
($ in millions)
Income tax expense (to balance) 36
*$60 installment sales less $40, the largest amount
with greater than 50% likelihood of sustainability.
Now consider what happens later, when uncertainty about the tax position is
resolved.
Interest income (permanent difference):
What if it is completely disallowed? (worst case)
What if it is completely upheld? (best case)
Installment income (temporary difference):
What if it is completely disallowed? (worst case)
Liability—projected additional tax 8
What if it is completely upheld? (best case)
Deferred tax liability (setting up additional DTL,
So, in general, when uncertainty resolves, the Liability—Cash (or income tax payable
additional tax is reduced to zero and the plug is to tax expense (with respect to permanent
differences) or to deferred taxes (with respect to temporary differences).