Time and Purpose of Problems (Continued)
Problem 19.8 (Time 40–50 minutes)
Purpose—to test a student’s understanding of the relationships that exist in the subject area of
accounting for income taxes. The student is required to compute and classify deferred income taxes for
Problem 19.9 (Time 40–50 minutes)
Purpose—to test a student’s ability to compute and classify deferred taxes for three temporary differences
SOLUTIONS TO PROBLEMS
PROBLEM 19.1
(a) X(.40) = $320,000 taxes due for 2019
X = $320,000 ÷ .40
X = $800,000 taxable income for 2019
2020
Income Tax Expense
($343,000 + $7,000 – $10,500) ………………………… 339,500
Deferred Tax Liability [($120,000 ÷ 4) X .35] ……….. 10,500
Income Taxes Payable ($980,000 X .35) ………. 343,000
Deferred Tax Asset [($40,000 ÷ 2) X .35] ……… 7,000
PROBLEM 19.2
(a) Before deferred taxes can be computed, the amount of temporary dif-
ference originating (reversing) each period and the resulting cumulative
temporary difference at each year-end must be computed:
2018
2019
2020
2021
Pretax financial income
€290,000
€320,000
€350,000
(€420,000
Cumulative Temporary
Difference At End of Year
2018
€140,000
2019
€265,000
2020
€385,000
2021
Because the temporary difference causes pretax financial income to
exceed taxable income in the period it originates, the temporary differ–
ence will cause future taxable amounts.
PROBLEM 19.2 (Continued)
The deferred taxes at the end of 2018 would be computed as follows:
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Depreciation
€140,000
35%
€49,000
Deferred tax liability at the end of 2018 ………………………… € 49,000
Deferred tax liability at the beginning of 2018 ………………. 0
2019
Income Tax Expense ……………………………………….. 7,000*
Deferred Tax Liability ………………………………… 7,000
*The adjustment due to the change in the tax rate is computed as
follows:
Cumulative temporary difference at the end
of 2018 ……………………………………………………………………. €140,000
Newly enacted tax rate for future years ………………………… X 40%
PROBLEM 19.2 (Continued)
Taxable income for 2019 ………………………………………………. €225,000
The deferred taxes at December 31, 2019, are computed as follows:
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Depreciation
€265,000
40%
€106,000
Deferred tax liability at the end of 2019 ………………………….. €106,000
Deferred tax expense for 2019 ………………………………………. € 50,000
Current tax expense for 2019 (Income taxes payable) …….. 90,000
Income tax expense (total) for 2019, exclusive
of adjustment due to change in tax rate …………………….. €140,000
2020
Income Tax Expense ………………………………………. 152,000
Income Taxes Payable ……………………………… 104,000
The deferred taxes at December 31, 2020, are computed as follows:
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Depreciation
€385,000
40%
€154,000
PROBLEM 19.2 (Continued)
Deferred tax liability at the end of 2020 ………………………….. €154,000
Deferred tax liability at the beginning of 2020 ………………… 106,000
2021
Income Tax Expense …………………………………….. 180,000
Deferred Tax Liability ……………………………………. 44,000
Income Taxes Payable ……………………………. 224,000
Taxable income for 2021 ………………………………………………. €560,000
The deferred taxes at December 31, 2021, are computed as follows:
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Depreciation
€275,000
40%
€110,000
(b) 2019
Income before income taxes …………………………. €320,000
LO: 1,2, Bloom: AP, Difficulty: Complex, Time: 50-60, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
PROBLEM 19.3
Book Depreciation
Tax Depreciation
Difference
2018
€ 150,000
€ 120,000*
(€ 30,000
2019
150,000
240,000
(90,000)
2020
150,000
240,000
(90,000)
2021
150,000
240,000
(90,000)
2023
150,000
120,000*
30,000
2024
150,000
2025
€1,200,000
(€ 0
(a) Pretax financial income for 2019 ………………………………… €1,400,000
Nontaxable interest …………………………………………………… (60,000)
Income taxes payable for 2019 …………………………………… € 437,500
(b) Income Tax Expense …………………………………….. 469,000
PROBLEM 19.3 (Continued)
Scheduling—End of 2019
Future Years
2020
2021
2022
Future taxable (deductible)
amounts
€(90,000)
€(90,000)
€(90,000)
Enacted tax rate
Deferred tax (asset) liability
Future Years
2023
2024
2025
Total
Future taxable (deductible)
amounts
€30,000
€150,000
€150,000
€60,000
Enacted tax rate
Deferred tax (asset) liability
The net deferred tax liability at December 31, 2019, is €21,000.
Scheduling—End of 2018
Future Years
2019
2020
2021
2022
Enacted tax rate
Deferred tax (asset) liability
Future taxable (deductible)
Future Years
2023
2024
2025
Total
Enacted tax rate
Deferred tax (asset) liability
Future taxable (deductible)
PROBLEM 19.3 (Continued)
The net deferred tax asset at December 31, 2018, is €10,500.
Deferred tax asset at the end of 2019 ……………………………… € 0
Deferred tax expense for 2019
(from deferred tax liability) …………………………………………. € 21,000
Deferred tax expense for 2019
(c) Income before income taxes ………………………… €1,200,000a
Income tax expense
Current (€437,500 – €70,000b) ………………… €367,500
Deferred ………………………………………………. 31,500 399,000
(d) Non-current liabilities
Deferred tax liability ……………………………………. €21,000
PROBLEM 19.4
(a) Schedule of Pretax Financial Income
and Taxable Income for 2019
Pretax financial income …………………………..………………….. $750,000
Permanent differences
Bond interest revenue……………………………………………. (4,000)
Pollution fines ………………………………………………………. 4,200
750,200
Temporary differences
Depreciation expense ……………………………………………. (30,000)*
The income taxes payable for 2019 is as follows:
Taxable income …………………………..……. $735,200
Tax rate ……………………………………………. X 30%
Income taxes payable ……………………….. $220,560
PROBLEM 19.4 (Continued)
(b) The journal entry to record income taxes payable, income tax expense
and deferred income taxes is as follows:
Income Tax Expense ……………………………………… 225,060*
*Deferred tax expense for 2019
(from deferred tax liability) ($9,000 + $7,500) …. $ 16,500
Deferred tax benefit for 2019
PROBLEM 19.5
(a) 2018
Income Tax Refund Receivable
[(£50,000 X 30%) + (£80,000 X 40%)] ……………….. 47,000
Benefit Due to Loss Carryback …………………… 47,000
2019
Income Tax Expense ………………………………………… 28,000
Deferred Tax Asset …………………………………….. 20,000
Income Taxes Payable
[(£70,000 – £50,000) X 40%] …………………….. 8,000
2020
(b) The income tax refund receivable account totaling £47,000 will be
reported under current assets on the statement of financial position at
December 31, 2018. This type of receivable is usually listed immediately
PROBLEM 19.5 (Continued)
(c) 2018 Income Statement
Operating loss before income taxes …………. £(180,000)
(d) 2019 Income Statement
Income before income taxes …………………….. £ 70,000
Income tax expense
Current …………………………………………….. £ 8,000a
Deferred …………………………………………… 20,000 28,000
Net income ……………………………………………… £ 42,000
PROBLEM 19.6
1.
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
2019
$ 300
30%a
$ 90
2020
300
30%b
90
2021
300
30%c
90
2022
35%d
2023
300
35%e
aTax rate for 2019. dTax rate for 2022
bTax rate for 2020. eTax rate for 2023.
cTax rate for 2021.
MOONEY CO.
Statement of Financial Position
December 31, 2018
2.
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
2019
$ 300
30%a
$ 90
2020
300
30%b
90
2021
300
30%c
90
2021
30%c
2022
300
35%d
PROBLEM 19.6 (Continued)
ROESCH CO.
Statement of Financial Position
December 31, 2018
Other assets (non-current)
PROBLEM 19.7
(a) Before deferred taxes can be computed, the amount of cumulative tem-
porary difference existing at the end of each year must be computed:
2018
2019
2020
Pretax financial income
£130,000
(£70,000
(£70,000
Taxable income
90,000
( 90,000
( 90,000
Cumulative temporary difference
Temporary difference originating
(
2018
Income Tax Expense ……………………………………….. 52,000
Income Taxes Payable ………………………………. 36,000
Deferred Tax Liability ………………………………… 16,000
Temporary
Difference
Future Taxable
(Deductible)
Amounts
Tax
Rate
December 31, 2018
Deferred Tax
(Asset)
Liability
Installment Accounts
Receivable
(
£ 40,000
40%a
£16,000
PROBLEM 19.7 (Continued)
Deferred tax expense for 2018 ……………………………………….. £16,000
Current tax expense for 2018 (Income taxes payable) ……… 36,000
Income tax expense for 2018 …………………………………………. £52,000
2019
Income Tax Expense ……………………………………….. 24,500
Deferred Tax Liability ………………………………………. 7,000
Income Taxes Payable ………………………………. 31,500
Taxable income for 2019 ……………………………………………….. £90,000
Enacted tax rate for 2019 ………………………………………………. X 35%
Current tax expense for 2019 (Income taxes payable) ……… £31,500
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
December 31, 2019
Deferred Tax
(Asset)
Liability
Installment Accounts
Receivable
£20,000
35%b
£ 7,000
PROBLEM 19.7 (Continued)
Deferred tax benefit for 2019 ………………………………………….. £ (7,000)
2020
Income Tax Expense ……………………………………….. 24,500
Temporary
Difference
Future Taxable
(Deductible)
Amounts
Tax
Rate
December 31, 2020
Deferred Tax
(Asset)
Liability
Installment Accounts
Receivable
(
£—0—
30%
£—0—
Deferred tax liability at the end of 2020 …………………………... £ 0
Deferred tax liability at the beginning of 2020 …………………. 7,000
Income tax expense for 2020 …………………………………………. £24,500
(b) December 31, 2018
Non-current liabilities
Deferred tax liability ……………………………………………….. £16,000
December 31, 2019
Non-current liabilities
Deferred tax liability ……………………………………………….. £ 7,000
December 31, 2020
PROBLEM 19.7 (Continued)
(c) 2018
Income before income taxes ………………………………… £130,000
Income tax expense
2019
Income before income taxes ………………………………… £70,000
Income tax expense
2020
Income before income taxes ………………………………… £70,000
Income tax expense
PROBLEM 19.8
(a)
Temporary
Difference
Future Taxable
(Deductible)
Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Depreciation
¥120,000,000*
40%
¥48,000,000
(b) Income Tax Expense ……………………………… 178,000,000
Deferred Tax Liability ………………………. 48,000,000
Income Taxes Payable …………………….. 130,000,000
¥130,000,000 taxes due for 2018 ÷ 40% 2018
tax rate = ¥325,000,000 taxable income for 2018.
Taxable income for 2018 ………………………………………… ¥325,000,000
Tax rate …………………………………………………………………. X 40%
(c) Income before income taxes …………… ¥445,000,000a
Income tax expense
Current …………………………………… ¥130,000,000
Deferred …………………………………. 48,000,000 178,000,000