PROBLEM 19-6
1.
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
2015
$ 300
30%a
$ 90
2016
300
30%b
90
2017
300
30%c
90
2018
300
35%d
2018
2019
300
35%e
MOONEY CO.
Balance Sheet
December 31, 2014
Other assets (noncurrent)
Deferred tax asset ($560 – $480) ………………………………… $80
2.
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
2015
$ 300
30%a
$ 90
2016
300
30%b
90
2017
300
30%c
90
2017
30%c
2018
300
35%d
PROBLEM 19-6 (Continued)
ROESCH CO.
Balance Sheet
December 31, 2014
PROBLEM 19-7
(a) Before deferred taxes can be computed, the amount of cumulative tem–
porary difference existing at the end of each year must be computed:
2014
2015
2016
$130,000
($70,000
($70,000
90,000
( 90,000
( 90,000
2014
Income Tax Expense ……………………………………….. 52,000
Income Taxes Payable ………………………………. 36,000
Temporary
Difference
Future Taxable
(Deductible)
Amounts
Tax
Rate
December 31, 2015
Deferred Tax
(Asset)
Liability
Installment Accounts
Receivable
(
$ 40,000
40%a
$16,000
PROBLEM 19-7 (Continued)
Deferred tax expense for 2014 ……………………………………….. $16,000
2015
Deferred Tax Liability ………………………………………. 2,000
Income Tax Expense …………………………………. 2,000*
Income Taxes Payable ………………………………. 31,500
*Cumulative temporary difference at the end of 2014 ………… $40,000
Newly enacted tax rate for future year ……………………………. X 35%
Adjusted balance of deferred tax liability at the end
of 2014 ……………………………………………………………………… 14,000
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
December 31, 2015
Deferred Tax
(Asset)
Liability
Installment Accounts
Receivable
$20,000
35%b
$ 7,000
PROBLEM 19-7 (Continued)
Deferred tax benefit for 2015 …………………………………………. $ (7,000)
Current tax expense for 2015 (Income taxes payable) ……… 31,500
Income tax expense for 2015 …………………………………………. $24,500
2016
Income Tax Expense ……………………………………….. 24,500
Temporary
Difference
Future Taxable
(Deductible)
Amounts
Tax
Rate
December 31, 2016
Deferred Tax
(Asset)
Liability
Installment Accounts
Receivable
(
$–0–
30%
$–0–
(b) December 31, 2014
Current liabilities
Deferred tax liability ……………………………………………….. $16,000
PROBLEM 19-7 (Continued)
(c) 2014
Income before income taxes ………………………………… $130,000
2015
Income before income taxes ………………………………… $70,000
2016
Income before income taxes ………………………………… $70,000
PROBLEM 19-8
(a)
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Depreciation
$(60,000)*
40%
$(24,000)
*(Computation shown on next page.)
(b) Income Tax Expense …………………………………….. 106,000
Deferred Tax Asset ……………………………………….. 24,000
Income Taxes Payable ……………………………. 130,000
(c) Income before income taxes ………………………….. $265,000a
Income tax expense
Current ………………………………………………….. $130,000
Deferred ………………………………………………… (24,000) 106,000
PROBLEM 19-8 (Continued)
Book Depreciation
Tax Depreciation
bDifference
2014
$120,000
$ 60,000*
($ 60,000
2015
120,000
120,000
0
2016
2017
2018
2019
0
( (60,000)
Totals
$600,000
($ 0
(d)
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Depreciation
$ (60,000)
40%
$(24,000)
40%
(75,000)
40%
$(210,000)
Temporary
Difference
Resulting Deferred Tax
Related Balance
Sheet Account
Classification
(Asset)
Liability
Depreciation
$(24,000)
Plant Assets
Noncurrent
Unearned Rent
Current
Unearned rent
Noncurrent
$(84,000)
Current assets
Deferred tax asset …………………………..……………………… $30,000
PROBLEM 19-8 (Continued)
(e) Income Tax Expense ………………………………………. 44,000
Deferred Tax Asset …………………………………………. 60,000
Income Taxes Payable ……………………………… 104,000
Deferred tax benefit for 2015 …………………………………………. $ (60,000)
Current tax expense for 2015 (Income taxes payable) ……… 104,000
Income tax expense for 2015 …………………………………………. $ 44,000
(f) Income before income taxes ……………………………. $110,000d
Income tax expense
Current ……………………………………………………. $104,000
PROBLEM 19-9
(a) Pretax financial income …………………………………………………. $100,000
Permanent differences:
Fine for pollution ……………………………………………………. 3,500
(b)
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Warranty costs
$ (5,000)
40%
$(2,000)
Construction profits
40%
Depreciation
40%
Totals
$(2,000)
(c) Income Tax Expense ……………………………………….. 40,800
Deferred Tax Asset ………………………………………….. 2,000
Deferred Tax Liability ………………………………… 18,000
Income Taxes Payable ………………………………. 24,800
PROBLEM 19-9 (Continued)
Deferred tax asset at the end of 2015 ……………………………… $ 2,000
Deferred tax asset at the beginning of 2015 ……………………. –0–
Deferred tax benefit for 2015 …………………………………………. $ (2,000)
(d) Income before income taxes ……………………………. $100,000
Income tax expense
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 19-1 (Time 15–20 minutes)
CA 19-2 (Time 20–25 minutes)
CA 19-3 (Time 20–25 minutes)
Purpose—to develop an understanding of temporary and permanent differences. The student is
required to explain the nature of four differences and to explain why each is a permanent or temporary
difference. Two of the four situations are challenging. Also, the nature of and the classification of deferred
tax accounts are examined.
CA 19-4 (Time 20–25 minutes)
Purpose—to develop an understanding of deferred taxes and balance sheet disclosure. This case has
CA 19-5 (Time 20–25 minutes)
CA 19-6 (Time 20–25 minutes)
Purpose—to develop an understanding of the concept of future taxable amounts and future deductible
CA 19-7 (Time 20–25 minutes)
Purpose—to provide the student an opportunity to examine the income effects of deferred taxes,
including ethical issues.
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 19-1
(a) The objectives in accounting for income taxes are:
(b) To implement the objectives, the following basic principles are applied in accounting for income
taxes at the date of the financial statements:
1. A current tax liability or asset is recognized for the estimated taxes payable or refundable
benefits that, based on available evidence, are not expected to be realized.
(c) The procedures for the annual computation of deferred income taxes are as follows:
1. Identify: (1) the types and amounts of existing temporary differences and (2) the nature and
amount of each type of operating loss and tax credit carryforward and the remaining length
CA 19-2
(a) The following basic principles are applied in accounting for income taxes at the date of the
financial statements:
1. A current tax liability or asset is recognized for the estimated taxes payable or refundable
(b) Dexter should do the following in accounting for the temporary differences.
1. Identify the types and amounts of existing temporary differences. The depreciation policies
give rise to a temporary difference that will result in net future taxable amounts (because
CA 19-2 (Continued)
(c) 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
asset is classified as current or noncurrent based on the classification of the related asset or
CA 19-3
(a) 1. Temporary difference. The full estimated three years of warranty costs reduce the current
year’s pretax financial income, but will reduce taxable income in varying amounts each
respective year, as paid. Assuming the estimate as to each warranty is valid, the total
2. Temporary difference. The difference between the tax basis and the reported amount (book
basis) of the depreciable property will result in taxable or deductible amounts in future years
when the reported amount of the asset is recovered (through use or sale of the asset);
hence, it is a temporary difference.
3. Temporary difference and permanent difference. The investor’s share of earnings of an
investee (other than subsidiaries and corporate joint ventures) accounted for by the equity
method is included in pretax financial income while only 20% of dividends received from
CA 19-3 (Continued)
4. Temporary difference. For financial reporting purposes, any gain experienced in an
involuntary conversion of a nonmonetary asset to a monetary asset must be recognized in
the period of conversion. For tax purposes, this gain may be deferred if the total proceeds
are reinvested in replacement property within a certain period of time. When such a gain is
CA 19-4
Part A.
(a) Deferred income taxes are reported in the financial statements when temporary differences exist
at the balance sheet date. Deferred taxes are never reported for permanent differences.
The tax consequences of most events recognized in the financial statements for a year are
(b) 1. Gross profit on installment sales—Deferred income taxes would be recognized when gross
profit on installment sales is included in pretax financial income in the year of sale and
included in taxable income when later collected.
2. Revenues on long-term construction contracts—Deferred income taxes would be recog–
CA 19-4 (Continued)
Part B.
Deferred income taxes related to a noncurrent asset or liability would be classified as a noncurrent item
in the balance sheet. Deferred income taxes are related to an asset or liability if reduction of the asset
or liability causes the underlying temporary difference to reverse.
CA 19-5
(a) The 45% tax rate would be used in computing the deferred tax liability at December 31, 2014, if a
net operating loss (an NOL) is expected in 2015 that is to be carried back to 2014 (the enacted
tax rate is 45% in 2014). (See discussion below.)
Discussion:
In determining the future tax consequences of temporary differences, it is helpful to prepare a schedule
which shows in which future years existing temporary differences will result in taxable or deductible
amounts. The appropriate enacted tax rate is applied to these future taxable and deductible amounts.
CA 19-5 (Continued)
For future taxable amounts:
1. If taxable income is expected in the year that a future taxable amount is scheduled, use the
For future deductible amounts:
1. If taxable income is expected in the year that a future deductible amount is scheduled, use the
CA 19-6
(a) Future taxable amounts increase taxable income relative to pretax financial income in the future
due to temporary differences existing at the balance sheet date. Future deductible amounts decrease
tax consequences attributable to the future deductible amounts scheduled.
(b) The carryback and carryforward provisions will affect the amounts to be reported for the resulting
deferred tax asset and deferred tax liability.
In computing deferred tax account balances to be reported at a balance sheet date, the appropri-
For future taxable amounts:
1. If taxable income is expected in the year that a future taxable amount is scheduled, use the
calculate the related deferred tax liability.
For future deductible amounts:
1. If taxable income is expected in the year that a future deductible amount is scheduled, use
CA 19-7
(a) To realize a sizable deferred tax liability, Acme must have used an accelerated depreciation
method for tax purposes while using straight-line depreciation for its financial statements. Once
the temporary difference reversed, taxable income would exceed financial accounting income.
(b) The deferral of income taxes means that due to temporary differences caused by the difference
in financial accounting principles and tax laws, a company will be able to defer paying its income
(c) The primary stakeholders who could be harmed by Acme’s income tax practice are the federal
(d) As a CPA, Stephanie is obligated to uphold objectivity and integrity in the practice of financial
its income taxes which should not be considered unethical.