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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, 12
1
1, 2, 4, 12, 18
1, 2, 3, 8
2. Identify temporary and
permanent differences.
3, 4, 5
4, 6, 7
1, 2, 3, 4
3, 4, 5
6. Carryback and carryforward
of NOL.
15, 16, 17
12, 13, 14
9, 10, 23,
24, 25
5
7. Change in enacted future
tax rate.
13
11
16
2, 7
5, 6
8. Tracking temporary differences
through reversal.
17
2, 7
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1. Describe the fundamentals of
accounting for income taxes.
1, 2, 3, 4, 5,
6, 7, 9, 14
1, 2, 3, 4, 5, 6,
7, 8, 11, 12,
13, 14, 15, 16,
17, 18, 19, 20,
21, 22
1, 2, 3, 4, 6,
7, 8, 9
1, 2, 3, 4,
5, 6, 7
3. Explain the accounting for loss
carrybacks and loss carryforwards.
12, 13, 14
9, 10, 23,
24, 25
5
6
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E19.1
One temporary difference, future taxable amounts, one rate, no
beginning deferred taxes.
Simple
15–20
E19.2
Two differences, no beginning deferred taxes, tracked through
2 years.
Simple
15–20
E19.3
One temporary difference, future taxable amounts, one rate,
beginning deferred taxes.
Simple
15–20
E19.4
Three differences, compute taxable income, entry for taxes.
Simple
15–20
E19.9
Carryback and carryforward of NOL, no temporary differences.
Simple
15–20
E19.10
Two NOLs, no temporary differences, entries and income
statement.
Moderate
20–25
E19.11
Three differences, classify deferred taxes.
Simple
10–15
E19.12
Two temporary differences, one rate, beginning deferred taxes,
compute pretax financial income.
Complex
20–25
E19.13
One difference, multiple rates, effect of beginning balance
versus no beginning deferred taxes.
Simple
20–25
E19.18
Three differences, multiple rates, future taxable income.
Moderate
20–25
E19.19
Two differences, one rate, beginning deferred balance, compute
pretax financial income.
Complex
25–30
E19.20
Two differences, no beginning deferred taxes, multiple rates.
Moderate
15–20
E19.21
Two temporary differences, multiple rates, future taxable
Moderate
20–25
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
Description
Level of
Difficulty
Time
(minutes)
P19.1
Three differences, no beginning deferred taxes, multiple rates.
Complex
40–45
P19.2
One temporary difference, tracked for 4 years, one permanent
difference, change in rate.
Complex
50–60
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
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 is to recognize deferred tax liabilities and assets for the
3. 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
or “turn around” in other periods. Therefore, a permanent difference is caused by an item that:
(1) is included in pretax financial income but never in taxable income, or (2) is included in taxable
income but never in pretax financial income.
4. 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
chapter all result from differences between taxable income and pretax financial income which will
reverse and result in taxable or deductible amounts in future periods.
5. 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
Questions Chapter 19 (Continued)
6. Book basis of assets €900,000
Tax basis of assets .................................................................................... 700,000
7.
Book basis of asset
€90,000
Deferred tax liability (end of 2019)
€ 30,600
Tax basis of asset
0
Deferred tax liability (beginning of 2019)
68,000
8. A future taxable amount will increase taxable income relative to pretax financial income in future
periods due to temporary differences existing at the statement of financial position date. A future
deductible amount will decrease taxable income relative to pretax financial income in future periods
9.
Taxable income
Future taxable amounts
£70,000
Tax rate
X 40%
Tax rate
40%
10. Deferred tax accounts are reported on the statement of financial position as assets and liabilities.
They should be classified in a net non-current amount.
LO: 1,2,4, Bloom: C, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
11. Deferred tax assets and deferred tax liabilities are separately recognized and measured but are
12. Pretax financial income ....................................................................................... $550,000
Interest income on governmental bonds ............................................................. (70,000)
Questions Chapter 19 (Continued)
13. £200,000 (2021 taxable amount)
X 10% (30% – 20%)
14. 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 relation of pre-tax financial income and taxable
15. The loss carryback provision permits a company to carry a net operating loss back two years and
receive refunds for income taxes paid in those years. The loss must be applied to the second
16. The company may choose to carry the net operating loss forward, or carry it back and then
forward for tax purposes. To forego the two-year carryback might be advantageous where a tax-
payer had tax credit carryovers that might be wiped out and lost because of the carryback of the
17. 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
tax asset. In the case of loss carryforwards, no tax prepayment has been made.
Others argue that realization of a loss carryforward is less likely—and thus should require a more
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 19.1
2019 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, 12/31/19 ....................................................... $42,000
Deferred tax liability, 12/31/18 ....................................................... (25,000)
BRIEF EXERCISE 19.5
Book value of warranty liability .................................................... £105,000
Tax basis of warranty liability ...................................................... 0
BRIEF EXERCISE 19.6
Deferred tax asset, 12/31/19 ......................................................... $59,000
BRIEF EXERCISE 19.7
Income Tax Expense ....................................................... 60,000
BRIEF EXERCISE 19.8
Income before income taxes .......................................... $195,000
BRIEF EXERCISE 19.9
Income Tax Expense ....................................................... 71,100
BRIEF EXERCISE 19.10
Year
Future taxable amount
X
Tax Rate
=
Deferred tax liability
2019
$ 42,000
34%
$ 14,280
BRIEF EXERCISE 19.11
Income Tax Expense ............................................... 120,000,000
BRIEF EXERCISE 19.12
Income Tax Refund Receivable .............................. 144,000
LO: 3, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
BRIEF EXERCISE 19.13
Income Tax Refund Receivable (€350,000 X .40) ... 140,000
BRIEF EXERCISE 19.14
Income Tax Refund Receivable (€350,000 X .40) ... 140,000
BRIEF EXERCISE 19.15
Non-current liabilities
SOLUTIONS TO EXERCISES
EXERCISE 19.1 (15–20 minutes)
(a) Pretax financial income for 2018 .......................................... $400,000
Temporary difference resulting in future taxable
(b)
Future Years
2019
2020
2021
Total
Future taxable (deductible) amounts
$55,000
$60,000
$75,000
$190,000
Tax rate
X 30%
X 30%
X 30%
Deferred tax liability (asset)
$16,500
$18,000
$22,500
$ 57,000
Deferred tax liability at the end of 2018 .................. $ 57,000
(c) Income before income taxes ................................... $400,000
Income tax expense
Current .............................................................. $63,000
EXERCISE 19.2 (15–20 minutes)
(a) Pretax financial income for 2019 ........................... £350,000
(b) Income Tax Expense .............................................. 140,000
Deferred Tax Asset ................................................. 10,000*
Income Taxes Payable (£335,000 X .40) ......... 134,000
(c) Income Tax Expense .............................................. 136,000*
Deferred Tax Liability (£10,000 X .40) .................... 4,000
EXERCISE 19.3 (15–20 minutes)
(a) Taxable income for 2019 ....................................... $400,000
Enacted tax rate ..................................................... X 40%
Income taxes payable for 2019 ............................. $160,000
(b)
Future Years
2020
2021
Total
EXERCISE 19.3 (Continued)
Deferred tax liability at the end of 2019 ............... $140,000
Deferred tax liability at the beginning of 2019 .... 90,000
(c) Income before income taxes ................................ $525,000
Income tax expense
Note to instructor: Because of the flat tax rate for all years, the amount
of cumulative temporary difference existing at the beginning of the
year can be calculated by dividing $90,000 by 40%, which equals
$225,000. The difference between the $225,000 cumulative temporary
difference at the beginning of 2019 and the $350,000 cumulative tem-
porary difference at the end of 2019 represents the net amount of
temporary difference originating during 2019 (which is $125,000). With
this information, we can reconcile pretax financial income with taxable
income as follows:
Pretax financial income ......................................................... $525,000
EXERCISE 19.4 (15–20 minutes)
(a) Pretax financial income for 2019 .......................................... € 80,000
Excess depreciation per tax return ...................................... (16,000)
EXERCISE 19.4 (Continued)
(b) Income Tax Expense ............................................... 27,300
Deferred Tax Asset .................................................. 8,100
Income Taxes Payable ..................................... 30,600
Deferred Tax Liability ....................................... 4,800
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Depreciation
(€ 16,000
30%
€4,800
Deferred tax asset at the end of 2019 ................................... € 8,100
Deferred tax asset at the beginning of 2019 ........................ 0
Deferred tax benefit for 2019 (increase
required in deferred tax asset) .......................................... € (8,100)
(c) Income before income taxes ................................ €80,000
Income tax expense
Current ........................................................... €30,600
Deferred ......................................................... (3,300) 27,300
EXERCISE 19.5 (15–20 minutes)
(a) Taxable income ........................................................ £115,000
(b) Income Tax Expense ............................................... 80,000
Deferred Tax Asset .................................................. 14,000
Income Taxes Payable ..................................... 46,000
Deferred Tax Liability ....................................... 48,000
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Deferred tax liability at the end of 2019 ................................ £ 88,000
Deferred tax liability at the beginning of 2019 ..................... (40,000)
Deferred tax expense for 2019 (increase
required in deferred tax liability) ....................................... £ 48,000
Deferred tax asset at the end of 2019 ................................... £ (14,000
Deferred tax asset at the beginning of 2019 ........................ 0
(c) Income before income taxes ................................ £200,000
Income tax expense
Current ........................................................... £46,000
EXERCISE 19.5 (Continued)
Note to instructor: Because of the flat tax rate for all years, the amount
of cumulative temporary difference existing at the beginning of the
year can be calculated by dividing the £40,000 balance in Deferred Tax
EXERCISE 19.6 (10–15 minutes)
(a) (2) (e) (2) (i) (1)
(b) (1) (f) (3) (j) (1)
EXERCISE 19.7 (10–15 minutes)
(a) greater than
(b) $170,000 = ($68,000 divided by 40%)
EXERCISE 19.8 (10–15 minutes)
(a) 2018
Income Tax Expense ................................ 336,000,000
Deferred Tax Asset (W20,000,000 X 40%) 8,000,000
2019
Income Tax Expense ................................ 364,000,000
2020
Income Tax Expense ............................... 378,000,000
(W933,000,000 X 40%) ...................... 373,200,000
(b) Non-current liabilities
Deferred tax liability
(W36,000,000 – W15,200,000) .......... W 20,800,000
(c) Pretax financial income .......................... W945,000,000
Income tax expense
EXERCISE 19.9 (15–20 minutes)
2016
Income Tax Expense ........................................................ 36,000
Income Taxes Payable ($90,000 X 40%) .................. 36,000
2017
Income Tax Refund Receivable
($160,000 X 45%) .......................................................... 72,000
Deferred Tax Asset ........................................................... 104,000
Benefit Due to Loss Carryforward
(Income Tax Expense)
[40% X ($350,000 – $90,000)] ................................ 104,000
2019
EXERCISE 19.10 (20–25 minutes)
(a) Income Tax Refund Receivable
[(€22,000 X 35%) + (€48,000 X 50%)] .................. 31,700
Benefit Due to Loss Carryback ...................... 31,700
(b) Operating loss before income taxes ..................... €(150,000)
Income tax benefit
Benefit due to loss carryback ........................ €31,700
Benefit due to loss carryforward .................... 32,000 63,700
Net loss .................................................................... € (86,300)
(e) Income Tax Refund Receivable
(€50,000 X 40%) ................................................... 20,000
Benefit Due to Loss Carryback ...................... 20,000
