19–21
EXERCISE 19-8 (10–15 minutes)
(a) 2012
Income Tax Expense ……………………………………… 336,000
Deferred Tax Asset ($20,000 X 40%) ……………….. 8,000
Deferred Tax Liability ($30,000 X 40%) ……….. 12,000
Income Taxes Payable ($830,000 X 40%) ……. 332,000
(b) Current assets
Deferred tax asset
($8,000 + $4,000 + $3,200) ………………………. $15,200
(c) Pretax financial income ………………………………… $945,000
Income tax expense
Current…………………………………………………….. $373,200
Deferred ($8,000 – $3,200) …………………………. 4,800 378,000
Net Income …………………………………………………… $567,000
EXERCISE 19-9 (15–20 minutes)
2010
Income Tax Expense ……………………………………………….. 36,000
Income Taxes Payable ($90,000 X 40%) ……………… 36,000
2012
Income Tax Refund Receivable …………………………..……. 36,000
Benefit Due to Loss Carryback
(Income Tax Expense) ($90,000 X 40%) …………… 36,000
2013
Income Tax Expense ……………………………………………….. 48,000
Deferred Tax Asset (40% X $120,000) …………………. 48,000
19–23
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
($80,000 X 40% = $32,000)
(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)
(d) Income before income taxes ……………………………. $ 90,000
Income tax expense
Current ……………………………………………………. $ 4,000
Deferred ………………………………………………….. 32,000 36,000
Net income …………………………………………………….. $ 54,000
EXERCISE 19-11 (10–15 minutes)
Resulting
Deferred Tax
Related Balance Sheet
Temporary Difference
(Asset)
Liability
Account
Classification
Depreciation
$200,000
Plant Assets
Noncurrent
Lawsuit obligation
$(50,000)
Lawsuit Obligation
Current
Installment sale
Installment Receivable
Current
Installment sale
Installment Receivable
Noncurrent
Totals
$(50,000)
*$120,000 X 40% = $48,000 **$300,000 – $48,000 = $252,000
Current assets
Deferred tax asset ($50,000 – $48,000) …………………………... $ 2,000
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
cumulative temporary differences underlying the beginning balances
of the deferred tax liability of $60,000 and the deferred tax asset of
$20,000.
19–25
EXERCISE 19-12 (Continued)
Cumulative temporary difference at 12/31/12
which will result in future deductible amounts …………… $ 95,000
Pretax financial income ………………………………………………… $ X
Originating difference which will result in future
taxable amounts ………………………………………………………. (60,000)
Originating difference which will result in future
(b) Income Tax Expense …………………………………………. 52,000
Deferred Tax Asset ……………………………………………. 18,000
Income Taxes Payable ………………………………… 46,000
($115,000 X 40%)
Deferred Tax Liability ………………………………….. 24,000
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
Deferred tax liability at the end of 2012 ………………………….. $84,000
Deferred tax liability at the beginning of 2012 ………………… 60,000
EXERCISE 19-12 (Continued)
Deferred tax asset at the end of 2012 …………………………….. $ (38,000
Deferred tax asset at the beginning of 2012 …………………… 20,000
Deferred tax benefit for 2012 (net increase
required in deferred tax asset) …………………………………… $ (18,000)
(c) Income before income taxes ………………………….. $130,000
Income tax expense
Current ………………………………………………….. $46,000
Deferred ………………………………………………… 6,000 52,000
Net income …………………………………………………… $ 78,000
EXERCISE 19-13 (20–25 minutes)
(a) Income Tax Expense …………………………..…………. 187,000
Income Taxes Payable …………………………….. 136,000
Deferred Tax Liability ………………………………. 51,000
19–27
EXERCISE 19-13 (Continued)
Deferred tax liability at the end of 2012 ……………… $ 51,000
Deferred tax liability at the beginning of 2012 ……. 0
Deferred tax expense for 2012 (net increase
required in deferred tax liability) …………………… 51,000
(b) Income Tax Expense ……………………………………….. 165,000
Income Taxes Payable ………………………………. 136,000
Deferred Tax Liability ………………………………… 29,000
Deferred tax liability at the end of 2012 ………………………….. $ 51,000
Deferred tax liability at the beginning of 2012 ………………… 22,000
Deferred tax expense for 2012 (net increase
EXERCISE 19-14 (20–25 minutes)
(a) Income Tax Expense ………………………………………. 290,000
Deferred Tax Asset …………………………………………. 50,000
Income Taxes Payable ……………………………… 340,000
EXERCISE 19-14 (Continued)
Deferred tax asset at the end of 2013 …………………………….. $200,000
Deferred tax asset at the beginning of 2013 …………………… 150,000
(b) The journal entry at the end of 2013 to establish a valuation account:
Income Tax Expense …………………………..………….. 30,000
Allowance to Reduce Deferred Tax Asset
to Expected Realizable Value ………………… 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
19–29
EXERCISE 19-15 (Continued)
Date
Cumulative Future Taxable
(Deductible) Amounts
Tax Rate
Deferred Tax
(Asset)
Liability
12/31/13
$(500,000)
40%
$(200,000)
Valuation account balance needed at the end of 2013 ……. $ 0
Valuation account balance at the beginning of 2013 ………. 40,000
Reduction in valuation account during 2013 ………………….. $ 40,000
(b) Income Tax Expense ………………………………………. 290,000
Deferred Tax Asset …………………………………………. 50,000
Income Taxes Payable ……………………………… 340,000
Date
Cumulative Future Taxable
(Deductible) Amounts
Tax Rate
Deferred Tax
(Asset)
Liability
12/31/13
$(500,000)
40%
$(200,000)
EXERCISE 19-15 (Continued)
Valuation account balance needed at the end of 2013 …… $200,000
Valuation account balance at the beginning of 2013 …….. (40,000)
Increase in valuation account during 2013 …………………… $160,000
Note to instructor: Although not requested by the instructions, the
pretax financial income can be computed by completing the following
reconciliation:
EXERCISE 19-16 (15–20 minutes)
(a)
Future Years
2013
2014
Total
Future taxable (deductible)
amounts
$1,000,000
$1,000,000
$2,000,000
Tax rate
X 40%*
X 34%
Deferred tax liability (asset)
$ 400,000
$ 340,000
$ 740,000
19–31
EXERCISE 19-16 (Continued)
* One-half of the installment receivable is classified as a current asset
and one-half is noncurrent. Therefore, the deferred tax liability related
to the portion of the receivable coming due in 2013 is current and the
deferred tax liability balance related to the portion of the receivable
coming due in 2014 is noncurrent.
Deferred tax liability at the end of 2012 ………… $ 740,000
(computed in (a))
Deferred tax liability at the
beginning of 2012 …………………………………… 800,000
Deferred tax benefit for 2012 due to change
in enacted tax rate (decrease in deferred
tax liability required) ……………………………….. $ (60,000)
*Pretax financial income is equal to the taxable income for 2012 because
there were no changes in the cumulative temporary difference and no
permanent differences.
EXERCISE 19-17 (30–35 minutes)
Journal entry at December 31, 2012:
Income Tax Expense …………………………..……………. 75,750
Deferred Tax Asset …………………………………………… 4,000
Income Taxes Payable ……………………………….. 73,350
The deferred tax account balances at December 31, 2012, are determined
as follows:
*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.
Deferred tax liability at the end of 2012 ………………………….. $ 6,400
Deferred tax liability at the beginning of 2012 ………………… 0
Deferred tax expense for 2012 (net increase
required in deferred tax liability) ………………………………… $ 6,400
19–33
EXERCISE 19-17 (Continued)
Journal entry at December 31, 2013:
Income Tax Expense …………………………..……………. 84,000
Deferred Tax Liability ……………………………………….. 3,200
Income Taxes Payable ……………………………….. 85,200
Deferred Tax Asset ……………………………………. 2,000
The deferred tax account balances at December 31, 2013, are determined
as follows:
Temporary
Difference
Future Taxable
(Deductible) Amounts
Rate
Deferred Tax
(Asset)
Liability
Installment sales
($8,000
40%
$3,200
Warranty costs
( (5,000)
40%
$(2,000)
Totals
$3,000
$(2,000)
$3,200*
Deferred tax asset at the end of 2013 …………………………….. $ 2,000
Deferred tax asset at the beginning of 2013 …………………… 4,000
Deferred tax expense for 2013 (decrease
required in deferred tax asset) …………………………………… $ 2,000
EXERCISE 19-17 (Continued)
Journal entry at December 31, 2014:
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 2014 …………………. $ 0
Deferred tax asset at the beginning of 2014 ……….. 2,000
Deferred tax expense for 2014 (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, 2012
Deferred Tax
(Asset)
Liability
19–35
EXERCISE 19-18 (Continued)
(b) Pretax financial income for 2012 ………………………. $250,000
Excess gross profit per books………………………….. (96,000)
Excess depreciation per tax return …………………… (30,000)
Excess rental income per tax return …………………. 100,000
Taxable income ……………………………………………….. $224,000
Taxable income ……………………………………………….. $224,000
Tax rate …………………………………………………………… 40%
Income taxes payable ………………………………………. $ 89,600
Deferred tax asset at the end of 2012 ………………… $ 35,000
Deferred tax asset at the beginning of 2012 ………. 0
Deferred tax benefit for 2012 (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
Related Balance
Sheet Account
Classification
(Asset)
Liability
$90 million estimated
(b) Current assets
Deferred tax asset …………………………………………….. $ 36,000,000
Long-term liabilities
Deferred tax liability ………………………………………….. $ 20,000,000
(c) Income before income taxes ……………….. $ 95,000,0002
Income tax expense
2$10,000,000 ÷ 40% = $25,000,000 cumulative taxable temporary difference
at the beginning of 2012.
Cumulative taxable temporary difference
at the end of 2012 ………………………………………………… $ 50,000,000
Cumulative taxable temporary difference
at the beginning of 2012 ………………………………………. 25,000,000
Taxable temporary difference originating
during 2012 ……………………………………………………….… $ 25,000,000
19–37
EXERCISE 19-19 (Continued)
Pretax financial income for 2012 ……………………………. $ X
Taxable temporary difference originating ……………….. (25,000,000)
Deductible temporary difference originating …………… 90,000,000
Taxable income for 2012 ……………………………………….. $160,000,000
deferred tax liability) ………………………………………….. $ 10,000,000
Deferred tax asset at the end of 2012 ……………………… $ 36,000,000
Deferred tax asset at the beginning of 2012 ……………. 0
Deferred tax benefit for 2012 (increase in
deferred tax asset) …………………………………………….. (36,000,000)
Deferred tax expense for 2012 ……………………………….. 10,000,000
Net deferred tax benefit for 2012 ……………………………. $(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
EXERCISE 19-20 (Continued)
Taxable income for 2012 ………………………………………….. $550,000
Tax rate …………………………………………………………………… 34%
Income taxes payable for 2012 …………………………………. $187,000
Deferred tax asset at the end of 2012 ………………………… $ 51,000
Deferred tax asset at the beginning of 2012 ………………. 0
Deferred tax benefit for 2012 (increase in
deferred tax asset) ……………………………………………….. $ (51,000)
(b) Current assets
Deferred tax asset …………………………………………….. $ 51,000
Long-term liabilities
Deferred tax liability ………………………………………….. $ 20,000
19–39
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
Temporary
Difference
Future Taxable
(Deductible)
Amounts
Tax
Rate
Deferred Tax
Classification
(Asset)
Liability
Installment sale
*$ 40,000
34%1
$13,600
Current
Installment sale
** 200,000*
38%2
76,000
Current
Loss accrual
*( (34,000)**
38%
$(12,920)
Noncurrent
Totals
**$206,000
$(12,920)
$89,600
*$50,000 + $60,000 + $90,000 = $200,000.
**$15,000 + $19,000 = $34,000.
1Tax rate for 2013.
2Tax rate for 2014–2017.
Deferred tax asset at the end of 2012 ………………………. $ 12,920
Deferred tax asset at the beginning of 2012 …………….. 0
Deferred tax benefit for 2012 (increase
required in deferred tax asset) …………………………….. $ (12,920)
(b) Other assets (noncurrent)
Deferred tax asset …………………………………………… $ 12,920
EXERCISE 19-21 (Continued)
The deferred tax asset is noncurrent because the related liability is
noncurrent. The liability from the accrual of the loss contingency is
noncurrent because it is expected to be settled in years later than the
year immediately following the balance sheet date.
The deferred tax liability is current because it is assumed that the
related installment receivable is classified as a current asset. The install-
ment receivable is classified as current when it is a trade practice for
the entity to sell on an installment basis. If you assume the installment
EXERCISE 19-22 (15–20 minutes)
(a) Income Tax Expense …………………………..…………. 112,200
Deferred Tax Asset ………………………………………… 6,800
Income Taxes Payable …………………………….. 102,000
Deferred Tax Liability ………………………………. 17,000