EXERCISE 19.11 (10–15 minutes)
Resulting Deferred Tax
Temporary Difference
(Asset)
Liability
Depreciation
€200,000
Lawsuit obligation
Installment sale
Totals
€500,000
EXERCISE 19.12 (20–25 minutes)
(a) To complete a reconciliation of pretax financial income and taxable
income, solving for the amount of pretax financial income, we must first
determine the amount of temporary differences arising or reversing
during the year. To accomplish that, we must determine the amount of
EXERCISE 19.12 (Continued)
Pretax financial income ………………………………………………… $ X
Originating difference which will result in future
taxable amounts ……………………………………………………….. (60,000)
(b) Income Tax Expense ………………………………………… 52,000
Deferred Tax Asset …………………………………………… 18,000
Income Taxes Payable ($115,000 X 40%) ……… 46,000
Deferred Tax Liability …………………………..…….. 24,000
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Item one
($210,000
40%
$84,000
Totals
$84,000*
Deferred tax liability at the end of 2019 ………………………….. $ 84,000
Deferred tax liability at the beginning of 2019 ………………… (60,000)
Deferred tax expense for 2019 (net increase
required in deferred tax liability) ………………………………… $ 24,000
EXERCISE 19.12 (Continued)
(c) Income before income taxes ………………………….. $130,000
Income tax expense
Current ………………………………………………….. $46,000
EXERCISE 19.13 (20–25 minutes)
(a) Income Tax Expense ………………………………………. 187,000
Income Taxes Payable ……………………………… 136,000
Deferred Tax Liability ……………………………….. 51,000
Taxable income for 2019 …………………………………. €340,000
Deferred tax liability at the end of 2019 ……………… € 51,000
Deferred tax liability at the beginning of 2019 ……. 0
Deferred tax expense for 2019 (net increase
EXERCISE 19.13 (Continued)
(b) Income Tax Expense ……………………………………….. 165,000
Income Taxes Payable ………………………………. 136,000
Deferred Tax Liability …………………………..……. 29,000
EXERCISE 19.14 (20–25 minutes)
(a) Income Tax Expense ……………………………………… 290,000
Deferred Tax Asset ………………………………………… 50,000
Income Taxes Payable …………………………….. 340,000
Taxable income ……………………………………………… €850,000
Date
Cumulative Future Taxable
(Deductible) Amounts
Tax Rate
Deferred Tax
(Asset)
Liability
12/31/19
€(500,000)
40%
€(200,000)
Deferred tax asset at the end of 2019 …………………………….. €200,000
EXERCISE 19.14 (Continued)
(b) The journal entry at the end of 2019:
Income Tax Expense ………………………………………. 30,000
Deferred Tax Asset ………………………………….. 30,000
Note to instructor: Although not requested by the instructions, the
pretax financial income can be computed by completing the following
reconciliation:
EXERCISE 19.15 (20–25 minutes)
(a) Income Tax Expense ………………………………………. 290,000
Deferred Tax Asset …………………………………………. 50,000
Income Taxes Payable ……………………………… 340,000
EXERCISE 19.16 (15–20 minutes)
(a)
Future Years
2020
2021
Total
Future taxable (deductible)
amounts
$1,000,000
$1,000,000
$2,000,000
(b) Deferred Tax Liability …………………………………. 60,000
Income Tax Expense ……………………………. 60,000
There are no changes during 2019 in the cumulative temporary
difference. The entire change in the deferred tax liability account is due
to the change in the enacted tax rate. That change is computed as
follows:
(c) Income before income taxes ……………………….. $5,000,000*
Income tax expense
Current ……………………………………………….. $2,000,000**
EXERCISE 19.16 (Continued)
**Taxable income for 2019 ………………………….. $5,000,000
Tax rate for 2019 (computed in (a)) ……………. X 40%
EXERCISE 19.17 (30–35 minutes)
Journal entry at December 31, 2018:
Income Tax Expense …………………………………………. 75,750
Deferred Tax Asset ……………………………………………. 4,000
The deferred tax account balances at December 31, 2018, are determined
as follows:
Temporary
Difference
Future Taxable
(Deductible) Amounts
Rate
Deferred Tax
(Asset)
Liability
*Because all deferred taxes were computed at the same rate, these totals
can be reconciled as follows: ¥6,000 X 40% = ¥(4,000) + ¥6,400.
EXERCISE 19.17 (Continued)
Deferred tax asset at the end of 2018 …………………………….. ¥( 4,000
Deferred tax expense for 2018 …………………………..………….. ¥ 6,400
Journal entry at December 31, 2019:
Income Tax Expense ………………………………………… 84,000
The deferred tax account balances at December 31, 2019, are determined
as follows:
Temporary
Difference
Future Taxable
(Deductible) Amounts
Rate
Deferred Tax
(Asset)
Liability
Installment sales
(¥8,000
40%
¥3,200
Totals
¥(2,000)
¥3,200*
*Because all deferred taxes were computed at the same rate, these totals
can be reconciled as follows: ¥3,000 X 40% = ¥(2,000) + ¥3,200.
Deferred tax liability at the end of 2019 ………………………….. ¥( 3,200
EXERCISE 19.17 (Continued)
Deferred tax asset at the end of 2019 …………………………..… ¥ 2,000
Deferred tax asset at the beginning of 2019 …………………… (4,000)
Deferred tax expense for 2019 (decrease
required in deferred tax asset) …………………………………… ¥ 2,000
Journal entry at December 31, 2020:
Income Tax Expense ………………………………………… 36,000
Deferred Tax Liability ……………………………………….. 3,200
Income Taxes Payable ……………………………….. 37,200
Deferred Tax Asset ……………………………………. 2,000
Deferred tax asset at the end of 2020 …………………. ¥ 0
Deferred tax asset at the beginning of 2020 ……….. 2,000
Deferred tax expense for 2020 (decrease
required in deferred tax asset) ……………………….. ¥ 2,000
EXERCISE 19.18 (20–25 minutes)
(a)
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
December 31, 2019
Deferred Tax
(Asset)
Liability
Installment sales
(£ 96,000
35%
£33,600
Depreciation
35%
Unearned rent
( (100,000)
35%
Totals
(£ 26,000
£44,100*
(b) Pretax financial income for 2019 ………………………. £250,000
Excess profit per books …………………………………… (96,000)
(c) Income Tax Expense ……………………………………….. 98,700
Deferred Tax Asset ………………………………………….. 35,000
Income Taxes Payable ………………………………. 89,600
Deferred tax asset at the end of 2019 ………………… £ 35,000
Deferred tax asset at the beginning of 2019 ………. 0
Deferred tax benefit for 2019 (net increase
required in deferred tax asset) ………………………. £ (35,000)
EXERCISE 19.19 (25–30 minutes)
(a) (All figures are in ¥ millions.)
Temporary Difference
Rate
Resulting Deferred Tax
(Asset)
Liability
(b) Non-current assets
Deferred tax asset
(¥36,000,000 – ¥20,000,000) ……….. ¥ 16,000,000
(c) Income before income taxes ……………….. ¥ 95,000,0002
Income tax expense
1Taxable income for 2019 ……………………. ¥160,000,000
Enacted tax rate ………………………….. X 40%
Income taxes payable for 2019 ……… ¥ 64,000,000
Cumulative deductible temporary difference
at the end of 2019 ……………………………………………….. ¥ 90,000,000
Cumulative deductible temporary difference
at the beginning of 2019 ………………………………………. 0
EXERCISE 19.19 (Continued)
Pretax financial income for 2019 ……………………………. ¥ X
Taxable temporary difference originating ……………….. (25,000,000)
Deductible temporary difference originating …………… 90,000,000
Taxable income for 2019 ……………………………………….. ¥160,000,000
Solving for X:
Deferred tax asset at the end of 2019 ……………………… ¥ 36,000,000
Deferred tax asset at the beginning of 2019 ……………. 0
Deferred tax benefit for 2019 (increase in
deferred tax asset) …………………………………………….. (36,000,000)
Deferred tax expense for 2019 …………………………..…… 10,000,000
Net deferred tax benefit for 2019 ……………………………. ¥ (26,000,000)
EXERCISE 19.20 (15–20 minutes)
(a) Income Tax Expense ……………………………………… 156,000
Deferred Tax Asset ………………………………………… 51,000
Income Taxes Payable …………………………….. 187,000
Deferred Tax Liability …………………………..….. 20,000
Future Years
2020
2021
2022
Total
Future taxable (deductible) amounts
Depreciation
Warranty costs
EXERCISE 19.20 (Continued)
Taxable income for 2019 ………………………………………….. $550,000
Tax rate …………………………………………………………………… X 34%
Income taxes payable for 2019 …………………………………. $187,000
Deferred tax asset at the end of 2019 ………………………… $ 51,000
Deferred tax asset at the beginning of 2019 ………………. 0
Deferred tax benefit for 2019 (increase in
deferred tax asset) ……………………………………………….. $ (51,000)
Deferred tax benefit for 2019 ……………………………………. $ (51,000)
Deferred tax expense for 2019 ………………………………….. 20,000
EXERCISE 19.21 (20–25 minutes)
(a) Income Tax Expense ………………………………………….. 212,680
Deferred Tax Asset …………………………………………….. 12,920
Income Taxes Payable …………………………………. 136,000
Deferred Tax Liability …………………………..………. 89,600
Taxable income ………………………………………………….. $400,000
Temporary
Difference
Future Taxable
(Deductible)
Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Installment sale
*$ 40,000*
34%1
$13,600
$89,600
Deferred tax liability at the end of 2019 ……………………. $ 89,600
Deferred tax liability at the beginning of 2019 ………….. 0
Deferred tax expense for 2019 …………………………..……. $ 89,600
Deferred tax benefit for 2019 …………………………………… (12,920)
(b) Non-current liabilities
Deferred tax liability ($89,600 – $12,920) ………………….. $ 76,680
EXERCISE 19.22 (15–20 minutes)
(a) Income Tax Expense ………………………………………. 112,200
Deferred Tax Asset …………………………………………. 6,800
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
*Because of a flat tax rate for all periods, these totals can be reconciled
as follows: $30,000 X 34% = $(6,800) + $17,000.
Deferred tax liability at the end of 2019 ……………………… $ 17,000
Deferred tax asset at the end of 2019 ………………………… $ 6,800
Deferred tax asset at the beginning of 2019 ………………. 0
Deferred tax benefit for 2019 (increase
required in deferred tax asset) ………………………………. $ (6,800)
Deferred tax expense for 2019 ………………………………….. $ 17,000
Deferred tax benefit for 2019 ……………………………………. (6,800)
EXERCISE 19.23 (30–35 minutes)
(a) 2017
Income Tax Expense ………………………………………. 37,400
Income Taxes Payable (£110,000 X 34%) ……. 37,400
2018
2020
Income Tax Expense ……………………………………… 83,600
Income Taxes Payable …………………………….. 60,800*
Deferred Tax Asset ………………………………….. 22,800
*[(£220,000 – £60,000) X 38%]
(b) Operating loss before income taxes ………………… £(260,000)
(c) 2019
Income Tax Refund Receivable ………………………. 68,000
Deferred Tax Asset ………………………………………… 17,100
EXERCISE 19.23 (Continued)
2020
Income Tax Expense …………………………………………. 83,600
Deferred Tax Asset …………………………………….. 17,100
(d) Operating loss before income taxes …………………… £(260,000)
Income tax benefit
Benefit due to loss carryback ……………………… £68,000
Benefit due to loss carryforward …………………….. 17,100 85,100
Net loss ……………………………………………………………. £(174,900)
Note: Using the assumption in part (a), the income tax section of the
2020 income statement would appear as follows:
EXERCISE 19.24 (30–35 minutes)
(a) 2017
Income Tax Expense ……………………………………… 40,000
Income Taxes Payable (€100,000 X 40%) ……. 40,000
2018
Income Tax Expense ……………………………………… 54,000
Deferred Tax Asset …………………………..………. 11,250
Benefit Due to Loss Carryforward ……………… 11,250
Income Taxes Payable
[(€120,000 – €50,000) X 45%] ………………….. 31,500
EXERCISE 19.25 (15–20 minutes)
(a) 2019
Income Tax Expense ($90,000 X .40) ………………. 36,000
Income Taxes Payable ……………………………. 36,000
2020
2021
Income Tax Expense ($180,000 X .40) …………….. 72,000
Income Taxes Payable
[($180,000 – $110,000) X .40] ……………….. 28,000
Deferred Tax Asset ………………………………… 35,200
Benefit Due to Loss Carryforward …………… 8,800
TIME AND PURPOSE OF PROBLEMS
Problem 19.1 (Time 40–45 minutes)
Purpose—to provide the student with an understanding of how to compute and properly classify
Problem 19.2 (Time 50–60 minutes)
Purpose—to provide the student with a situation where: (1) a temporary difference originates over a
three-year period and begins to reverse in the fourth period, (2) a change in an enacted tax rate occurs
Problem 19.3 (Time 40–45 minutes)
Purpose—to provide the student with an understanding of how future temporary differences for existing
depreciable assets are considered in determining the future years in which existing temporary
Problem 19.4 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of permanent and temporary differences when
there are multiple differences and a single rate.
Problem 19.5 (Time 20–25 minutes)
Purpose—to provide the student with a situation involving a net operating loss which can be partially
Problem 19.6 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of how the computation and classification of
Problem 19.7 (Time 45–50 minutes)
Purpose—to provide the student with a situation where: (1) a temporary difference originates in one