CHAPTER 19
SOLUTIONS TO B EXERCISES
E19-1B (15–20 minutes)
(a) Pretax financial income for 2014 ……………………………………. $125,000
Temporary difference resulting in future deductible
amounts in 2015 ……………………………………………………….. 40,000
(b)
Future Years
2015
2015
Total
Future taxable (deductible) amounts
$(40,000)
$(70,000)
$(110,000)
Tax rate
40%
40%
Deferred tax liability (asset)
$(16,000)
$(28,000)
$ (44,000)
E19-1B (Continued)
(c) Income before income taxes …………………………….. $125,000
E19-2B (15–20 minutes)
(a) Pretax financial income for 2014 …………………………………. $160,000
(b) Income Tax Expense ……………………………………… 56,000
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Depreciation
($80,000
35%
$28,000
Unearned revenue
35%
(c) Income Tax Expense ……………………………………… 91,000*
Deferred Tax Liability ($20,000 X .35) ………………. 7,000
E19-3B (15–20 minutes)
(a) Taxable income for 2014 ……………………………………………….. $280,000
E19-3B (Continued)
(b)
Future Years
2015
2016
2017
2018
Total
Deferred tax liability
Future taxable (deductible)
Deferred tax liability at the end of 2014 ……………. $120,000
Deferred tax liability at the beginning of 2014 ….. 80,000
Deferred tax expense for 2014 (increase
required in deferred tax liability) ………………….. 40,000
(c) Income before income taxes …………………………... $380,000
Income tax expense
Current ………………………………………………… $112,000
Deferred ……………………………………………….. 40,000 152,000
Net income …………………………………………………….. $228,000
Note: Because of the flat tax rate for all years, the amount of cumulative
temporary difference existing at the beginning of the year can be calcu-
E19-4B (15–20 minutes)
(a) Pretax financial income for 2014 …………………………………. $260,000
Excess depreciation per tax return ……………………………… (40,000)
(b) Income Tax Expense …………………………..…………… 101,400
Deferred Tax Asset ………………………………………….. 26,000
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Depreciation
($40,000
40%
$16,000
Unearned rent
( (65,000)
40%
Totals
$16,000
Deferred tax liability at the end of 2014 ……………………….. $ 16,000
Deferred tax asset at the end of 2014 ………………………….. $ (26,000)
Deferred tax asset at the beginning of 2014 ………………… 0
Deferred tax benefit for 2014 (increase
required in deferred tax asset) ………………………………… $ (26,000)
E19-4B (Continued)
(c) Income before income taxes ……………………… $260,000
Income tax expense
E19-5B (15–20 minutes)
(a) Taxable income ……………………………………………….. $265,000
(b) Income Tax Expense ………………………………………… 138,000
Deferred Tax Asset…………………………………………… 24,000
Income Tax Payable ………………………………….. 106,000
Deferred Tax Liability ………………………………… 56,000
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Deferred tax asset at the end of 2014 …………………………. $ (48,000)
Deferred tax asset at the beginning of 2014 ………………… (24,000)
Deferred tax benefit for 2014 (increase
required in deferred tax asset) …………………………..…… $ (24,000)
E19-5B (Continued)
(c) Income before income taxes ……………………….. $345,000
Income tax expense
Current ……………………………………………….. $106,000
Deferred ……………………………………………… 32,000 138,000
Net income ………………………………………………… $207,000
Note: Because of the flat tax rate for all years, the amount of cumulative
temporary difference existing at the beginning of the year can be
E19-6B (10–15 minutes)
(a) (1) (f) (3)
E19-7B (10–15 minutes)
(a) $500,000
(b) benefit of $44,000
E19-8B (10–15 minutes)
(a) 2014
Income Tax Expense ………………………………………….. 67,500
Deferred Tax Asset ($10,000 X 30%) …………………….. 3,000
Deferred Tax Liability ($20,000 X 30%) ………….. 6,000
(b)
Current assets
Deferred tax asset ($3,000 + $4,500) ………………………….. $7,500
noncurrent.
(c)
Pretax financial income ………………………………………… $268,000
Income tax expense
E19-9B (15–20 minutes)
2014
Income Tax Refund Receivable
($65,000 X 40% + $40,000 X 35%) ……………………….. 40,000
Benefit Due to Loss Carryback
(Income Tax Expense) ………………………………… 40,000
2016
Deferred Tax Asset ……………………………………………….. 17,500
Benefit Due to Loss Carryforward
(Income Tax Expense)
($50,000 X 35%) ………………………………………….. 17,500
E19-10B (20–25 minutes)
(a) Income Tax Refund Receivable—2009
($63,000 X 40%) …………………………………………….. 25,200
(b) Operating loss before income taxes …………………… $(86,000)
Income tax benefit
Benefit due to loss carryback ……………………… 32,100
Net loss ……………………………………………………………. $(53,900)
(d) Operating loss before income taxes ………………….. $(93,000)
Income tax expense
Benefit due to loss carryback …………………….. $ 3,900
Benefit due to loss carryforward ………………… 32,000 35,900
Net loss …………………………………………………………… $(57,100)
E19-10B (Continued)
(f) Operating loss before income taxes ………………….. $(135,000)
E19-11B (10–15 minutes)
Resulting Deferred Tax
Related Balance Sheet
Temporary Difference
(Asset)
Liability
Account
Classification
Depreciation
$110,000
Plant Assets
Noncurrent
Lawsuit obligation
Noncurrent
Current
Warranties**
Warranty Accrual
Noncurrent
E19-12B (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
result in future taxable amounts ……………………………….. $ 88,000
Cumulative temporary difference at 12/31/14
which will result in future deductible amounts …………… $965,000
Cumulative temporary difference at 1/1/14
which will result in future deductible amounts …………… 540,000
E19-12B (Continued)
(b) Income Tax Expense …………………………..……………. 14,700
Deferred Tax Asset …………………………………………… 127,500
Temporary
Difference
Future Taxable
(Deductible) Amounts
Tax
Rate
Deferred Tax
(Asset)
Liability
Item 4
($838,000
30%
$251,400
Item 5
( (965,000)
30%
$(289,500)
Totals
$(289,500)
$251,400
Deferred tax liability at the end of 2014 ……………………….. $ 251,400
Deferred tax liability at the beginning of 2014 ……………… 225,000
Deferred tax expense for 2014 (net increase
required in deferred tax liability) ……………………………… $ 26,400
(c) Income before income taxes ……………………… $49,000
(d) Because of the flat tax rate for all years involved and no permanent
differences, the effective rate should equal the statutory rate. The
E19-13B (20–25 minutes)
(a) Income Tax Expense ………………………………………. 312,750
Income Tax Payable ………………………………… 181,500
Deferred Tax Liability ………………………………. 131,250
(b) Income Tax Expense ………………………………………. 176,750
Deferred Tax Liability ……………………………………… 4,750
Income Tax Payable ………………………………… 181,500
The income tax payable for 2014 of $181,500 and the $131,250 balance for
Deferred Tax Liability at December 31, 2014, would be computed the
E19-14B (20–25 minutes)
(a) Income Tax Expense …………………………..………….. 225,000
Deferred Tax Asset …………………………………… 30,000
Income Tax Payable …………………………………. 195,000
Date
Cumulative Future Taxable
(Deductible) Amounts
Tax Rate
Deferred Tax
(Asset)
Liability
12/31/14
$(750,000)
30%
$(225,000)
Deferred tax asset at the end of 2014 ……………………………… $(225,000)
Deferred tax asset at the beginning of 2014 ……………………. (255,000)
(b) The journal entry at the end of 2014 to establish a valuation account:
Income Tax Expense …………………………..………….. 112,500
Allowance to Reduce Deferred Tax Asset
to Expected Realizable Value ………………… 112,500
Note: Although not requested by the instructions, the pretax financial
income can be computed by completing the following reconciliation:
E19-15B (20–25 minutes)
(a) Income Tax Expense ………………………………………. 225,000
Deferred Tax Asset ………………………………….. 30,000
Income Tax Payable ………………………………… 195,000
Date
Cumulative Future Taxable
(Deductible) Amounts
Tax Rate
Deferred Tax
(Asset)
Liability
12/31/14
$(750,000)
30%
$(225,000)
Deferred tax asset at the end of 2014 …………………………. $(225,000)
Deferred tax asset at the beginning of 2014 ………………… (255,000)
Valuation account needed at the
end of 2014 ……………………………………………………………. $ 0
Valuation account balance at the beginning
E19-15B (Continued)
(b) Income Tax Expense …………………………..…………. 225,000
Deferred Tax Asset ………………………………….. 30,000
Income Tax Payable ………………………………… 195,000
Allowance to Reduce Deferred Tax Asset
Date
Cumulative Future Taxable
(Deductible) Amounts
Tax Rate
Deferred Tax
(Asset)
Liability
12/31/14
$(750,000)
30%
$(225,000)
Deferred tax asset at the end of 2014 …………………………….. $(225,000)
Valuation account needed at the end of 2014 …………………. $ 112,500
Valuation account balance at the beginning of 2014 ………. 125,000
Decrease in valuation account during 2014 ……………………. $ 12,500
Note: Although not requested by the instructions, the pretax financial
income can be computed by completing the following reconciliation:
Pretax financial income for 2014 …………………………………. $ X
E19-16B (15–20 minutes)
(a)
Future Years
2015
2016
Total
Future taxable (deductible) amounts
$ 0
$(2,500,000)
$(2,500,000)
Tax rate
40%*
45%
Deferred tax liability (asset)
(b) Deferred Tax Asset……………………………………………. 125,000
Income Tax Expense ………………………………….. 125,000
There are no changes during 2014 in the cumulative temporary
difference. The entire change in the deferred tax liability account is due to
the change in the enacted tax rate. That change is computed as follows: