EXERCISE 19-22 (Continued)
Deferred tax liability at the end of 2013 $17,000
Deferred tax liability at the beginning of 2013 –0–
Deferred tax expense for 2013 (increase
required in deferred tax liability) $17,000
(b)
Temporary
Difference
Resulting Deferred Tax
Related Balance
Sheet Account
Classification
(Asset)
Liability
Accounts receivable
$17,000
Accounts Receivable
Current
Litigation liability
$(10,200)
____
Lawsuit Obligation
Current
Totals
$(10,200)
$17,000
The deferred tax asset is current because the related liability is current.
EXERCISE 19-23 (30–35 minutes)
(a) 2012
EXERCISE 19-23 (Continued)
2013
Income Tax Expense ………………………………………. 30,600
Income Taxes Payable ($90,000 X 34%) ……… 30,600
2014
Income Tax Refund Receivable ………………………. 71,400
2015
Income Tax Expense ……………………………………… 83,600
Income Taxes Payable …………………………….. 57,000*
Deferred Tax Asset ………………………………….. 26,600
*[($220,000 – $70,000) X 38%]
(c) 2014
Income Tax Refund Receivable ………………………. 71,400
Deferred Tax Asset ………………………………………… 26,600
Benefit Due to Loss Carryback ………………… 71,400*
Benefit Due to Loss Carryforward ……………. 26,600**
EXERCISE 19-23 (Continued)
2015
Income Tax Expense …………………………………………. 83,600
(d) Operating loss before income taxes $(280,000)
Income tax benefit
Benefit due to loss carryback $71,400
Benefit due to loss carryforward ($26,600 – $6,650) 19,950 91,350
Net loss $(188,650)
Note: Using the assumption in part (c), the income tax section of the
2015 income statement would appear as follows:
EXERCISE 19-24 (30–35 minutes)
(a) 2012
Income Tax Expense ……………………………………… 48,000
Income Taxes Payable ($120,000 X 40%) ……. 48,000
2013
Benefit Due to Loss Carryforward …………………… 15,750
Allowance to Reduce Deferred Tax Asset
to Expected Realizable Value …………………. 15,750
(50% X $31,500)
2015
(b) Operating loss before income taxes $(280,000)
Income tax benefit
EXERCISE 19-24 (Continued)
(c) Income before income taxes $120,000
EXERCISE 19-25 (15–20 minutes)
(a) 2014
Income Tax Expense ($120,000 X .40) …………….. 48,000
Income Taxes Payable ……………………………. 48,000
2015
2016
Income Tax Expense …………………………………….. 72,000
Income Taxes Payable ……………………………. 32,000
EXERCISE 19-25 (Continued)
(b) Loss before income taxes $(570,000)
Income tax benefit
TIME AND PURPOSE OF PROBLEMS
Problem 19-1 (Time 40–45 minutes)
Purpose—to provide the student with an understanding of how to compute and properly classify
Problem 19-2 (Time 50–60 minutes)
Purpose—to provide the student with a situation where: (1) a temporary difference originates over a
Problem 19-3 (Time 40–45 minutes)
Purpose—to provide the student with an understanding of how future temporary differences for existing
depreciable assets are considered in determining the future years in which existing temporary
Problem 19-4 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of permanent and temporary differences when
there are multiple differences and a single rate.
Problem 19-5 (Time 20–25 minutes)
Purpose—to provide the student with a situation involving a net operating loss which can be partially
Problem 19-6 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of how the computation and classification of
deferred income taxes are affected by the individual future year(s) in which future taxable and
deductible amounts are scheduled to occur because of existing temporary differences. Two situations
are given and the student is required to compute and classify the deferred income taxes for each. A net
deferred tax asset results in both cases.
Problem 19-7 (Time 45–50 minutes)
Purpose—to provide the student with a situation where: (1) a temporary difference originates in one
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
Problem 19-9 (Time 40–50 minutes)
Purpose—to test a student’s ability to compute and classify deferred taxes for three temporary
differences and to draft the income tax expense section of the income statement for the year.
SOLUTIONS TO PROBLEMS
PROBLEM 19-1
(a) X(.40) = $320,000 taxes due for 2014
X = $320,000 ÷ .40
X = $800,000 taxable income for 2014
(b) Taxable income [from part (a)]………………………….. $800,000
Pretax financial income for 2014 ………………… $890,000
(c) 2014
Income Tax Expense
($320,000 + $42,000 – $14,000) ………………………. 348,000
(d) Income before income taxes …………………………….. $890,000
Income tax expense
Current …………………………………………………….. $320,000
(a) Before deferred taxes can be computed, the amount of temporary
difference originating (reversing) each period and the resulting cumula-
tive temporary difference at each year-end must be computed:
2014
2015
2016
2017
Pretax financial income
$290,000
$320,000
$350,000
($(420,000
320,000
350,000
Cumulative Temporary
Difference At End of Year
2014
$140,000
2015
$265,000
($140,000 + $125,000)
2016
$385,000
($265,000 + $120,000)
Because the temporary difference causes pretax financial income to
exceed taxable income in the period it originates, the temporary
difference will cause future taxable amounts.
PROBLEM 19-2 (Continued)
The deferred taxes at the end of 2014 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 2014 …………………………. $ 49,000
2015
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 2014 ……………………………………………………………………. $140,000
Newly enacted tax rate for future years ………………………… 40%
PROBLEM 19-2 (Continued)
Taxable income for 2015 ………………………………………………. $225,000
The deferred taxes at December 31, 2015, 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 2015 ………………………….. $106,000
2016
Income Tax Expense ……………………………………… 152,000
Income Taxes Payable …………………………….. 104,000
Deferred Tax Liability ………………………………. 48,000
The deferred taxes at December 31, 2016, 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)
2017
Income Tax Expense …………………………………….. 180,000
Deferred Tax Liability ……………………………………. 44,000
The deferred taxes at December 31, 2017, are computed as follows:
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Depreciation
$275,000
40%
$110,000
(b) 2015
Income before income taxes …………………………. $320,000
Income tax expense
Current …………………………………………………… $90,000
Book Depreciation
Tax Depreciation
Difference
2014
$ 150,000
$ 120,000*
($ 30,000
2015
150,000
240,000
(90,000)
2016
150,000
240,000
(90,000)
2017
150,000
240,000
(90,000)
2018
150,000
240,000
(90,000)
2019
150,000
120,000*
30,000
2020
150,000
2021
150,000
(a) Pretax financial income for 2015 ……………………. $1,400,000
Nontaxable interest ……………………………………….. (60,000)
(b) Income Tax Expense …………………………………….. 469,000
Income Taxes Payable ……………………………. 437,500
PROBLEM 19-3 (Continued)
Scheduling—End of 2015
Future Years
2016
2017
2018
Enacted tax rate
Deferred tax (asset) liability
Future taxable (deductible)
Future Years
2019
2020
2021
Total
Enacted tax rate
Deferred tax (asset) liability
Future taxable (deductible)
The net deferred tax liability at December 31, 2015, is $21,000.
Scheduling—End of 2014
Future Years
2015
2016
2017
2018
Enacted tax rate
Deferred tax (asset) liability
Future taxable (deductible)
Future Years
2019
2020
2021
Total
Enacted tax rate
Deferred tax (asset) liability
Future taxable (deductible)
PROBLEM 19-3 (Continued)
The net deferred tax asset at December 31, 2014, is $10,500.
Deferred tax liability at the end of 2015 …………………………... $ 21,000
Deferred tax liability at the beginning of 2015 …………………. –0–
Deferred tax expense for 2015 (increase in
deferred tax liability) ………………………………………………….. $ 21,000
Current tax expense for 2015 (Income taxes payable) ……… $437,500
Deferred tax expense for 2015 ……………………………………….. 31,500
Income tax expense for 2015 …………………………………………. $469,000
(c) Income before income taxes and
extraordinary item ……………………………………. $1,200,000a
Income tax expense
(d) Long-term liabilities
Deferred tax liability …………………………………….. $21,000
PROBLEM 19-4
(a) Schedule of Pretax Financial Income
and Taxable Income for 2014
Pretax financial income ………………………………………………. $750,000
Permanent differences
Insurance expense …………………………..……………………. 9,000
Bond interest revenue …………………………………………… (4,000)
Pollution fines ………………………………………………………. 4,200
The income taxes payable for 2014 is as follows:
Taxable income ………………………………… $744,200
Tax rate ……………………………………………. 30%
Income taxes payable ……………………….. $223,260
The computation of the deferred income taxes for 2014 is as follows:
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 …………………………..…………. 227,760*
PROBLEM 19-5
(a) 2014
Income Tax Refund Receivable
[($50,000 X 30%) + ($80,000 X 40%)] ………………… 47,000
Benefit Due to Loss Carryback ……………………. 47,000
2016
Income Tax Expense …………………………………………. 35,000
Income Taxes Payable ($100,000 X 35%) ……… 35,000
(b) The income tax refund receivable account totaling $47,000 will be
reported under current assets on the balance sheet at December 31, 2014.
This type of receivable is usually listed immediately above inventory in
PROBLEM 19-5 (Continued)
(c) 2014 Income Statement
Operating loss before income taxes …………… $(180,000)
(d) 2015 Income Statement
Income before income taxes ………………………. $70,000
Income tax expense
Current ………………………………………………. $ 8,000a
Deferred …………………………………………….. 20,000 28,000
Net income …………………………..…………………… $42,000