19-1
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, 13
1, 2, 3, 4, 5,
12, 18, 20, 21
1, 2, 3, 4, 8
5. Determine deferred income
taxes and related items—
multiple tax rates, expected
future income.
10
2, 13, 16, 17,
18, 20, 22
1, 2, 6, 7
1, 6, 7
multiple rates, expected future
losses.
10
8. Change in enacted future
tax rate.
2, 7
5, 6
9. Tracking temporary differences
through reversal.
8, 17
2, 7
10. Income statement presentation.
9
8
1, 2, 3, 4, 5, 7,
10, 12, 16, 19,
23, 24, 25
1, 2, 3, 5,
7, 8, 9
1, 2, 8, 19
7
1, 2, 7
2. Identify temporary and
permanent differences.
3, 4, 5
4, 5, 6, 7
2, 3, 4
3, 4, 5
4. Classification of deferred taxes.
10, 11, 12
7, 11, 16, 18,
19, 20, 21, 22
3, 6
2, 3, 5
19-2
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Exercises
Problems
1. Identify differences between pretax
financial income and taxable income.
3. Describe a temporary difference that
results in future deductible amounts.
4, 5, 7, 8, 11, 12,
14, 15, 17, 18,
19, 20, 21, 22
1, 2, 4,
6, 8, 9
5. Describe the presentation of income tax
expense in the income statement.
1, 3, 4, 5, 8,
12, 15, 16
1, 2, 3, 4,
5, 7, 8, 9
6. Describe various temporary and permanent
differences.
4, 6, 7
2, 3, 9
7. Explain the effect of various tax rates and
tax rate changes on deferred income taxes.
13, 16, 17, 18,
21, 23, 24, 25
5, 7
8. Apply accounting procedures for a loss
carryback and a loss carryforward.
9, 10, 23,
24, 25
5
9. Describe the presentation of deferred
income taxes in financial statements.
8, 11, 16, 19,
20, 21, 22
3, 5, 6, 8, 9
8, 11, 12, 13,
16, 17, 18, 19,
20, 21, 22
7, 8, 9
19-3
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
E19-4
Three differences, compute taxable income, entry for taxes.
Simple
15–20
E19-5
Two temporary differences, one rate, beginning deferred taxes.
Simple
15–20
E19-6
Identify temporary or permanent differences.
Simple
10–15
E19-7
Terminology, relationships, computations, entries.
Simple
10–15
E19-8
Two temporary differences, one rate, 3 years.
Simple
10–15
E19-9
Carryback and carryforward of NOL, no valuation account, no
15–20
E19-10
Two NOLs, no temporary differences, no valuation account,
20–25
E19-11
Three differences, classify deferred taxes.
Simple
10–15
E19-12
Two temporary differences, one rate, beginning deferred taxes,
Complex
20–25
E19-13
One difference, multiple rates, effect of beginning balance
versus no beginning deferred taxes.
Simple
20–25
E19-14
Deferred tax asset with and without valuation account.
Moderate
20–25
E19-15
Deferred tax asset with previous valuation account.
Complex
20–25
E19-16
E19-17
Two temporary differences, tracked through 3 years,
multiple rates.
Moderate
30–35
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.
25–30
Deferred tax liability, change in tax rate, prepare section of
Complex
15–20
E19-20
Two differences, no beginning deferred taxes, multiple rates.
Moderate
15–20
E19-21
Two temporary differences, multiple rates, future taxable
income.
Moderate
20–25
E19-22
Two differences, one rate, first year.
Simple
15–20
E19-23
NOL carryback and carryforward, valuation account versus no
valuation account.
30–35
E19-24
NOL carryback and carryforward, valuation account needed.
Complex
30–35
E19-2
Two differences, no beginning deferred taxes, tracked through
15–20
E19-3
One temporary difference, future taxable amounts, one rate,
15–20
19-4
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
P19-5
NOL without valuation account.
Simple
20–25
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
CA19-1
Objectives and principles for accounting for income taxes.
15–20
CA19-2
Basic accounting for temporary differences.
Moderate
20–25
CA19-3
Identify temporary differences and classification criteria.
Complex
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.
Complex
20–25
CA19-6
and carryforward affects deferred taxes.
CA19-7
Deferred taxes, income effects.
Moderate
20–25
Explain future taxable and deductible amounts, how carryback
Complex
20–25
P19-4
Permanent and temporary differences, one rate.
Moderate
20–25
SOLUTIONS TO CODIFICATION EXERCISES
CE19-1
Master Glossary
(a) The deferred tax consequences attributable to deductible temporary differences and carryforwards.
A deferred tax asset is measured using the applicable enacted tax rate and provisions of the
enacted tax law. A deferred tax asset is reduced by a valuation allowance if, based on the weight
of evidence available, it is more likely than not that some portion or all of a deferred tax asset will
not be realized.
CE19-2
According to FASB ASC 740-10–30-2 (Income Taxes—Initial Measurement):
The following basic requirements are applied to the measurement of current and deferred income taxes
at the date of the financial statements:
CE19-3
According to FASB ASC 740-10-S99-2 (Income Taxes—SEC Materials):
19-6
CE19-4
According to FASB ASC 740-10–25-6 (Income Taxes—Recognition):
An entity shall initially recognize the financial statement effects of a tax position when it is more likely
than not, based on the technical merits, that the position will be sustained upon examination. The term
more likely than not means a likelihood of more than 50 percent; the terms examined and upon
examination also include resolution of the related appeals or litigation processes, if any. For example, if
19-7
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
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
(2) Depreciation for financial reporting purposes is less than that deducted in tax returns in early
years of assets’ lives because of using an accelerated depreciation method for tax purposes.
(3) Rent and royalties taxed when collected, but deferred for financial reporting purposes and
recognized as revenue when earned in later periods. (4) Unrealized gains or losses recognized in
income for financial reporting purposes but deferred for tax purposes.
5. An originating temporary difference is the initial difference between the book basis and the tax basis
6. Book basis of assets ……………………………………………………………………….. $900,000
Tax basis of assets …………………………………………………………………………. 700,000
Questions Chapter 19 (Continued)
7.
Book basis of asset
$90,000
Deferred tax liability (end of 2013)
$ 30,600
Tax basis of asset
0
Deferred tax liability (beginning of 2013)
68,000
Future taxable amounts
Deferred tax benefit for 2013
Tax rate
X 34%
Income taxes payable for 2013
230,000
Deferred tax liability (end of 2013)
$30,600
Total income tax expense for 2013
$192,600
8. 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
existing temporary differences.
9.
Taxable income
$100,000
Future taxable amounts
$70,000
Tax rate
X 40%
Tax rate
X 40%
Income taxes payable
$ 40,000
Deferred tax liability (end of 2013)
$28,000
Deferred tax liability (end of 2013)
$ 28,000
Current tax expense
$40,000
Deferred tax expense for 2013
$ 28,000
Income tax expense for 2013
$68,000
10. Deferred tax accounts are reported on the balance sheet as assets and liabilities. They should be
classified in a net current and a net noncurrent amount. An individual deferred tax liability or
11. The balances in the deferred tax accounts should be analyzed and classified on the balance
sheet in two categories: one for the net current amount, and one for the net noncurrent amount.
This procedure is summarized as indicated below.
(1) Classify the amounts as current or noncurrent. If an amount is related to a specific asset or
liability, it should be classified in the same manner as the related asset or liability. If not so
related, it should be classified on the basis of the expected reversal date.
12. A deferred tax asset or liability is considered to be related to an asset or liability if reduction of the
asset or liability will cause the temporary difference to reverse or turn around.
19-9
Questions Chapter 19 (Continued)
13. Pretax financial income ……………………………………………………………………………. $550,000
Interest income on municipal bonds ………………………………………………………….. (70,000)
14. $200,000 (2015 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
16. 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
17. 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
taxpayer had tax credit carryovers that might be wiped out and lost because of the carryback of
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
19–10
Questions Chapter 19 (Continued)
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
expense or related payables or by increasing an income tax refund receivable or deferred tax
asset.
19–11
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 19-1
2012 taxable income ……………………………………………………… $120,000
Tax rate ………………………………………………………………………… X 40%
12/31/12 income taxes payable……………………………………….. $ 48,000
BRIEF EXERCISE 19-3
Income Tax Expense …………………………………………. $67,500***
Deferred Tax Liability ………………………………….. 12,000**
Income Taxes Payable ………………………………… 55,500*
*$185,000 X 30% = $55,500
**$40,000 X 30% = $12,000
***$55,500 + $12,000 = $67,500
BRIEF EXERCISE 19-4
19–12
BRIEF EXERCISE 19-5
Book value of warranty liability ……………………………………………. $105,000
BRIEF EXERCISE 19-6
Deferred tax asset, 12/31/13 …………………………………………………. $59,000
BRIEF EXERCISE 19-7
Income Tax Expense …………………………..………………….. 60,000
Allowance to Reduce Deferred Tax Asset
to Expected Realizable Value ………………………… 60,000
BRIEF EXERCISE 19-8
BRIEF EXERCISE 19-9
Income Tax Expense …………………………..………………….. 71,100
Income Taxes Payable ($148,000* X 45%) ………….. 66,600
Deferred Tax Liability ($10,000 X 45%) ………………. 4,500
19–13
BRIEF EXERCISE 19-10
Year
Future taxable amount
X
Tax Rate
=
Deferred tax liability
2013
$ 42,000
34%
$ 14,280
2014
244,000
34%
82,960
2015
294,000
40%
117,600
$214,840
BRIEF EXERCISE 19-12
Income Tax Refund Receivable ………………………………. 144,000
Benefit Due to Loss Carryback
$97,500 + [($480,000 – $325,000) X 30%] ……….. 144,000
BRIEF EXERCISE 19-14
Income Tax Refund Receivable ($350,000 X. 40) ……… 140,000
Benefit Due to Loss Carryback ………………………… 140,000
BRIEF EXERCISE 19-15
Current assets
Deferred tax asset ($62,000 – $38,000) …………….. $24,000
19–15
SOLUTIONS TO EXERCISES
EXERCISE 19-1 (15–20 minutes)
(a) Pretax financial income for 2012 …………………………………… $400,000
Temporary difference resulting in future taxable
amounts in 2013 ……………………………………………………….. (55,000)
in 2014 ……………………………………………………….. (60,000)
(b)
Future Years
2013
2014
2015
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 2012 ……………… $ 57,000
Deferred tax liability at the beginning of 2012 ……. 0
Deferred tax expense for 2012 (increase in
deferred tax liability) …………………………………….. 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 2012 ……………………… $350,000
Excess of tax depreciation over
book depreciation …………………………..……………. (40,000)
Rent received in advance ………………………………… 25,000
Taxable income ……………………………………….. $335,000
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
**Depreciation
($40,000
40%
$16,000
*Unearned rent
( (25,000)
40%
$(10,000)
$(10,000)
$16,000
EXERCISE 19-3 (15–20 minutes)
(a) Taxable income for 2012 ………………………………… $400,000
Enacted tax rate …………………………………………….. 40%
Income taxes payable for 2012 ……………………….. $160,000
(b)
Future Years
Future taxable (deductible) amounts
$175,000
$175,000
Tax Rate
40%
40%
Deferred tax liability (asset)
$ 70,000
$ 70,000
19–17
EXERCISE 19-3 (Continued)
Deferred tax liability at the end of 2012 ……………. $140,000
Deferred tax liability at the beginning of 2012 ….. 90,000
Deferred tax expense for 2012 (increase
required in deferred tax liability) …………………. 50,000
Current tax expense for 2012
(Income taxes payable) ………………………………. 160,000
Income tax expense for 2012 ………………………….. $210,000
Note to instructor: Because of the flat tax rate for all years, the amount
of cumulative temporary difference existing at the beginning of the
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 2012 and the $350,000 cumulative tem–
porary difference at the end of 2012 represents the net amount of
temporary difference originating during 2012 (which is $125,000). With
this information, we can reconcile pretax financial income with taxable
income as follows:
Pretax financial income ………………………………………………… $525,000
Temporary difference originating giving rise
to net future taxable amounts ………………………………. (125,000)
Taxable income ………………………………………………………. $400,000
EXERCISE 19-4 (15–20 minutes)
19–18
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
Deferred tax liability at the end of 2012 ………………………….. $ 4,800
Deferred tax liability at the beginning of 2012 ………………… 0
Deferred tax expense for 2012 (increase
required in deferred tax liability) ………………………………… $ 4,800
Deferred tax expense for 2012 ………………………………………. $ 4,800
Deferred tax benefit for 2012 …………………………………………. (8,100)
Net deferred tax benefit for 2012 …………………………………… (3,300)
Current tax expense for 2012 (Income taxes payable) …….. 30,600
Income tax expense for 2012 ………………………………………… $27,300
(d)
$27,300
= 34.1% effective tax rate for 2012.
$80,000
EXERCISE 19-5 (15–20 minutes)
(a) Taxable income ……………………………………………….. $115,000
Enacted tax rate ………………………………………………. 40%
Income taxes payable ………………………………………. $ 46,000
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
First one
($220,000
40%
$88,000
Second one
( (35,000)
40%
$(14,000)
Totals
$185,000
$(14,000)
$88,000
*Because of a flat tax rate, these totals can be reconciled: $185,000 X
40% = $(14,000) + $88,000.
Deferred tax asset at the end of 2012 …………………………….. $ 14,000
Deferred tax asset at the beginning of 2012 …………………… 0
Deferred tax benefit for 2012 (increase
required in deferred tax asset) …………………………………… $ (14,000)
(c) Income before income taxes ………………………….. $200,000
Income tax expense
Current ………………………………………………….. $46,000
Deferred …………………………..……………………. 34,000 80,000
Net income …………………………………………………… $120,000
19–20
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
Liability by 40%, which equals $100,000. This information may now be
combined with the other facts given in the exercise to reconcile pretax
financial income with taxable income as follows:
EXERCISE 19-6 (10–15 minutes)
(a) (2) (e) (2) (i) (3)*
(b) (1) (f) (3) (j) (1)
(c) (3) (g) (2) (k) (1)
(d) (1) (h) (3)
EXERCISE 19-7 (10–15 minutes)
(a) greater than
(b) $170,000 = ($68,000 divided by 40%)
(c) are not