CHAPTER 19
Accounting for Income Taxes
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1. Reconcile pretax financial
income with taxable income.
1, 14
1, 2, 3, 4, 5,
10, 16, 18, 19
1, 2, 3, 4, 8
2. Identify temporary and
permanent differences.
3, 4, 12, 13
4, 5, 6, 7
2, 3, 4
3, 4, 5
3. Determine deferred income
single tax rate.
10, 13
1, 2, 3, 4,
5, 6, 7, 9
1, 3, 4, 5, 7, 8,
3, 4, 8, 9
2
4. Classification of deferred
taxes.
11
15
7, 8, 9, 14, 16,
17, 18, 19, 20
3, 6
2, 3, 5
multiple tax rates, expected
future income.
6. Determine deferred taxes,
multiple rates, expected future
losses.
10
7. Carryback and carryforward
of NOL.
16, 17, 18,
12, 13, 14,
*15, *16
21, 22, 23, 24,
25, *26, *27
5
8. Change in enacted future
tax rate.
14
11
14
2, 7
5, 6
9. Tracking temporary differences
through reversal.
8, 15
2, 7
10. Income statement presentation.
9, 10
8
1, 2, 3, 4, 5, 7,
10, 14, 17, 22,
1, 2, 3, 5,
7, 8, 9
1, 2, 7
7
1, 2, 7
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Questions
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1, 2, 3, 4, 5,
6, 7, 8, 9, 10,
11
3, 4, 5, 6, 7,
8, 9, 10
1, 2, 3, 4, 5, 6,
7, 8, 10, 11,
12, 13, 14, 15,
16, 17, 18, 19,
20, 21, 22
1, 2, 3, 4,
6, 7, 8, 9
1, 2, 6, 7
12, 13, 14,
1, 2, 3, 5, 6,
7, 8, 10, 11
1, 2, 3, 4, 5, 6,
7, 8, 10, 11,
12, 13, 14, 15,
16, 17, 18, 19,
1, 2, 3, 4,
7, 8, 9
3, 4, 5
16, 17, 18
12, 13, 14
21, 22, 23, 24,
5
6
15, 19
4, 15
9, 14, 19, 20
1, 3, 4, 6,
7, 8, 9
3, 4
15, 16
26, 27
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E19.1
One temporary difference, future taxable amounts, one rate, no
beginning deferred taxes.
Moderate
15–20
E19.2
Two differences, no beginning deferred taxes, tracked through
2 years.
Moderate
15–20
E19.3
One temporary difference, future taxable amounts, one rate,
beginning deferred taxes.
Moderate
15–20
E19.4
Three differences, compute taxable income, entry for taxes.
Moderate
15–20
E19.5
Two temporary differences, one rate, beginning deferred taxes.
Moderate
15–20
E19.6
Identify temporary or permanent differences.
Moderate
10–15
E19.7
Terminology, relationships, computations, entries.
Moderate
10–15
E19.8
Two temporary differences, one rate, 3 years.
Moderate
10–15
E19.9
Three differences, classify deferred taxes.
Moderate
10–15
E19.10
Two temporary differences, one rate, beginning deferred taxes,
20–25
E19.11
One difference, multiple rates, effect of beginning balance
versus no beginning deferred taxes.
Moderate
20–25
E19.12
Deferred tax asset with and without valuation account.
Moderate
20–25
E19.13
Deferred tax asset with previous valuation account.
Complex
20–25
E19.14
Deferred tax liability, change in tax rate, prepare section of
income statement.
Complex
15–20
E19.15
Two temporary differences, tracked through 3 years,
multiple rates.
Moderate
30–35
E19.16
Three differences, multiple rates, future taxable income.
Moderate
20–25
E19.17
Two differences, one rate, beginning deferred balance, compute
pretax financial income.
Complex
25–30
Two differences, no beginning deferred taxes, multiple rates.
Complex
15–20
Two temporary differences, multiple rates, future taxable
income.
Moderate
20–25
E19.20
Two differences, one rate, first year.
Moderate
15–20
Carryforward of NOL, no valuation account, no temporary
differences.
15–20
E19.22
Two NOLs, no temporary differences, no valuation account,
entries and income statement.
Moderate
20–25
NOL carryforward, valuation account versus no valuation
30–35
NOL carryforward, valuation account needed.
Complex
NOL carryforward, valuation account needed.
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
Description
Level of
Difficulty
Time
(minutes)
*E19.26
Carryback and carryforward of NOL, no valuation account, no
temporary differences.
Moderate
15–20
*E19.27
NOL carryback and carryforward.
Moderate
15–20
P19.1
Three differences, no beginning deferred taxes, multiple rates.
40–45
P19.2
One temporary difference, tracked for 4 years, one permanent
difference, change in rate.
Complex
50–60
P19.3
Second year of depreciation difference, two differences, single
rate, discontinued operations.
Complex
40–45
P19.4
Permanent and temporary differences, one rate.
Moderate
20–25
NOL without valuation account.
P19.6
Two differences, two rates, future income expected.
Moderate
20–25
P19.7
One temporary difference, tracked 3 years, change in rates,
income statement presentation.
Complex
45–50
P19.8
Two differences, 2 years, compute taxable income and pretax
financial income.
Complex
40–50
P19.9
Five differences, compute taxable income and deferred taxes,
draft income statement.
Complex
40–50
CA19.1
Objectives and principles for accounting for income taxes.
Simple
15–20
CA19.2
Basic accounting for temporary differences.
Moderate
20–25
CA19.4
Accounting and classification of deferred income taxes.
Moderate
20–25
CA19.5
Explain computation of deferred tax liability for multiple tax rates.
20–25
CA19.6
Explain future taxable and deductible amounts, how
carryforward affects deferred taxes.
Complex
20–25
CA19.7
Deferred taxes, income effects.
Moderate
20–25
ANSWERS TO QUESTIONS
1. Pretax financial income is reported on the income statement and is often referred to as income
2. One objective of accounting for income taxes is to recognize the amount of taxes payable or
refundable for the current year. A second objective is to recognize deferred tax liabilities and
3. A temporary difference is a difference between the tax basis of an asset or liability and its
reported (carrying or book) amount in the financial statements that will result in taxable amounts
or deductible amounts in future years when the reported amount of the asset is recovered or
when the reported amount of the liability is settled. The temporary differences discussed in this
4. An originating temporary difference is the initial difference between the book basis and the tax basis
of an asset or liability. A reversing difference occurs when a temporary difference that originated
5. Book basis of assets ……………………………………………………………………….. $900,000
Tax basis of assets …………………………………………………………………………. 700,000
6.
Book basis of asset
$90,000
Deferred tax liability (end of 2021)
$ 15,300
Tax basis of asset
–0–
Deferred tax liability (beginning of 2021)
68,000
Future taxable amounts
Deferred tax benefit for 2021
Tax rate
X 17%
Income taxes payable for 2021
230,000
Deferred tax liability (end of 2021)
Income tax expense for 2021
Questions Chapter 19 (Continued)
7. A future taxable amount will increase taxable income relative to pretax financial income in future
periods due to temporary differences existing at the balance sheet date. A future deductible
amount will decrease taxable income relative to pretax financial income in future periods due to
8.
Taxable income
$100,000
Future taxable amounts
$70,000
Tax rate
X 20%
Tax rate
X 20%
Income taxes payable
Deferred tax liability (end of 2021)
Deferred tax liability (end of 2021)
Current tax expense
$20,000
Deferred tax expense for 2021
Income tax expense for 2021
$34,000
9. In this case, the decrease in the deferred tax asset of $20,000 is added to income taxes payable
10. In this case, the increase in the deferred tax liability increased income tax expense by $40,000
11. Deferred tax accounts are reported on the balance sheet as assets and liabilities. Companies
should classify these accounts as a net noncurrent amount on the balance sheet. That is,
12. A permanent difference is a difference between taxable income and pretax financial income that,
under existing applicable tax laws and regulations, will not be offset by corresponding differences
Questions Chapter 19 (Continued)
Examples of permanent differences are: (1) interest received on municipal obligations (such
13. Pretax financial income ……………………………………………………………………………. $550,000
Interest income on municipal bonds ………………………………………………………….. (70,000)
14. $200,000 (2023 taxable amount)
10% (.30 – .20)
15. Some of the reasons for requiring income tax component disclosures are:
(a) Assessment of the quality of earnings. Many investors seeking to assess the quality of a
company’s earnings are interested in the reconciliation of pretax financial income to taxable
16. The loss carryforward provision permits a company to carry forward a net operating loss
17. The company may choose to carry the net operating loss forward.
For financial reporting purposes, the benefits of an operating loss carryforward are recognized as
a deferred tax asset in the loss year. If it is more likely than not that the asset will be realized, the
Questions Chapter 19 (Continued)
18. Many believe that future deductible amounts arising from net operating loss carryforwards are
different from future deductible amounts arising from normal operations. One rationale provided
is that a deferred tax asset arising from normal operations results in a tax prepayment—a prepaid
19. Uncertain tax positions are tax positions for which the tax authorities may disallow a deduction in
whole or in part. Uncertain tax positions often arise when a company takes an aggressive approach
in its tax planning, such as instances in which the tax law is unclear or the company may believe
that the risk of audit is low. Such positions give rise to tax benefits by either reducing income tax
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 19.1
2020 taxable income ……………………………………………………… $120,000
BRIEF EXERCISE 19.2
Excess depreciation on tax return ………………………………….. $ 40,000
BRIEF EXERCISE 19.3
Income Tax Expense …………………………………………. $67,500***
Deferred Tax Liability ………………………………….. 12,000**
BRIEF EXERCISE 19.4
Deferred tax liability, 12/31/21 ………………………………………… $42,000
Deferred tax liability, 12/31/20 ………………………………………… 25,000
BRIEF EXERCISE 19.5
Book value of warranty liability ……………………………………………. $105,000
BRIEF EXERCISE 19.6
Deferred tax asset, 12/31/21 …………………………………………………. $59,000
Deferred tax asset, 12/31/20 …………………………………………………. 30,000
BRIEF EXERCISE 19.7
Income Tax Expense ………………………………………………. 60,000
BRIEF EXERCISE 19.8
Income before income taxes …………………………………… $195,000
Income tax expense
BRIEF EXERCISE 19.9
Income Tax Expense ………………………………………………. 39,500
BRIEF EXERCISE 19.10
Year
Future taxable amount
X
Tax Rate
=
Deferred tax liability
2021
$ 42,000
17%
$ 7,140
2022
17%
2023
BRIEF EXERCISE 19.11
Income Tax Expense ……………………………………………… 60,000
BRIEF EXERCISE 19.12
BRIEF EXERCISE 19.13
Deferred Tax Asset $500,000 X .20 ………………………….. 100,000
Income Tax Expense (Loss Carryforward) ……….. 100,000
BRIEF EXERCISE 19.14
Deferred tax liability ($38,000 + $96,000) …………………. $134,000
Deferred tax asset ($62,000 + $27,000) ……………………. 89,000
*BRIEF EXERCISE 19.15
Income Tax Refund Receivable ……………………………… 144,000
* BRIEF EXERCISE 19.16
Income Tax Refund Receivable ($350,000 X 20%) …… 70,000
Income Tax Expense (Loss Carryback) ……………. 70,000
SOLUTIONS TO EXERCISES
EXERCISE 19.1 (15–20 minutes)
(a) Pretax financial income for 2020 $300,000
Temporary difference resulting in future taxable
(b)
Future Years
2021
2022
2023
Total
Future taxable (deductible) amounts
$55,000
$60,000
$65,000
$180,000
Tax rate
30%
30%
30%
Deferred tax liability (asset)
$16,500
$18,000
$19,500
$ 54,000
Deferred tax liability at the end of 2020 $54,000
Deferred tax liability at the beginning of 2020 –0–
(c) Income before income taxes $300,000
Income tax expense
Current $36,000
Deferred 54,000 90,000
EXERCISE 19.2 (15–20 minutes)
(a) Pretax financial income for 2019 $300,000
Excess of tax depreciation over book depreciation (40,000)
Rent received in advance 20,000
Taxable income for 2019 $280,000
(b) Income Tax Expense ($56,000 + $8,000 – $4,000). 60,000
Deferred Tax Asset …………………………..……………. 4,000*
Temporary
Future Taxable
Tax
Deferred Tax
(Asset)
Liability
**Depreciation
($40,000
20%
$8,000
*Unearned rent
( (20,000)
20%
$8,000
(c) Income Tax Expense ……………………………………… 67,000*
Deferred Tax Liability ($10,000 X .20) ………………. 2,000
Income Taxes Payable ($325,000 X .20) …….. 65,000
Deferred Tax Asset ($20,000 X .20) …………… 4,000
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
**Depreciation
($30,000
20%
$6,000
*Unearned rent
20%
$ 0
$ 0
$6,000
EXERCISE 19.3 (15–20 minutes)
(a) Taxable income for 2020 $405,000
(b)
Future Years
2021
2022
Total
Future taxable (deductible) amounts
$175,000
$175,000
$350,000
Tax rate
Deferred tax liability (asset)
$ 35,000
$ 35,000
(c) Income before income taxes $525,000
Income tax expense
Current $81,000
Deferred 24,000 105,000
Net income $420,000
Note to instructor: Because of the flat tax rate for all years, the amount
of cumulative temporary difference existing at the beginning of the
EXERCISE 19.4 (15–20 minutes)
(a) Pretax financial income for 2020 $70,000
Excess depreciation per tax return (16,000)
(b) Income Tax Expense ……………………………………….. 24,300
Deferred Tax Asset …………………………..……………… 6,600
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Depreciation
($16,000
30%
$4,800
Unearned rent
( (22,000)
30%
$(6,600)
Totals
$ (6,000)
$(6,600)*
$4,800*
EXERCISE 19.4 (Continued)
(c) Income before income taxes $70,000
Income tax expense
Current $26,100
EXERCISE 19.5 (15–20 minutes)
(a) Taxable income $95,000
Enacted tax rate 20%
Income taxes payable $19,000
(b) Income Tax Expense ……………………………………….. 40,000
EXERCISE 19.5 (Continued)
Deferred tax expense for 2020 $28,000
(c) Income before income taxes $200,000
Income tax expense
Current $19,000
Deferred 21,000 40,000
Net income $160,000
Note: The details on the current/deferred tax expense can be disclosed
in the notes to the financial statements.
Note to instructor: Because of the same tax rate for all years, the
amount of cumulative temporary difference existing at the beginning of
EXERCISE 19.6 (10–15 minutes)
(a) (2) (e) (2) (i) (3)*
(b) (1) (f) (2) (j) (1)
EXERCISE 19.7 (10–15 minutes)
(a) greater than
(b) $190,000 = ($38,000 divided by 20%)
EXERCISE 19.8 (10–15 minutes)
(a) 2020
Income Tax Expense ………………………………………. 168,000
Deferred Tax Asset ($20,000 X .20) ………………….. 4,000
Deferred Tax Liability ($30,000 X .20) ………… 6,000
Income Taxes Payable ($830,000 X .20) …….. 166,000
(b)
Deferred tax asset ($4,000 + $2,000 + $1,600) $7,600
Deferred tax liability ($6,000 + $8,000 + $2,000) 16,000
Net non-current liability (deferred tax liability) $8,400
(c)
Pretax financial income $945,000