ACC423 E19-6 E19-9 P19-1 P19-3
E19-6 (Identify Temporary or Permanent Differences)
Listed below are items that are commonly accounted for differently for financial reporting purposes than they are for tax purposes.
For each item below, indicate whether it involves:
(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
(3) A permanent difference.
Use the appropriate number to indicate your answer for each.
(a) 2 The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes for some plant assets.
(b) 1 A landlord collects some rents in advance. Rents received are taxable in the period when they are received.
(c) 3 Expenses are incurred in obtaining tax-exempt income.
(d) 1 Costs of guarantees and warranties are estimated and accrued for financial reporting purposes.
(e) 2 Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes.
(f) 3 Interest is received on an investment in tax-exempt municipal obligations.
(g) 2 For some assets, straight-line depreciation is used for both financial reporting purposes and tax purposes but the assets' lives are shorter for tax purposes.
(h) 3 Proceeds are received from a life insurance company because of the death of a key officer. (The company carries a policy on key officers.)
(i) 3 The tax return reports a deduction for 80% of the dividends received from U.S. corporations. The cost method is used in accounting for the related investments for financial reporting purposes.
(j) 1 Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled.
(k) 1 Expenses on stock options are accrued for financial reporting purposes.
E19-9 Carryback and Carryforward of NOL, No Valuation Account, No Temporary Differences)
The pretax financial income(or loss) figures for Synergetics Company are as follows.
2006 $160,000
2007 250,000
2008 90,000
2009 (160,000)
2010 (350,000)
2011 120,000
2012 100,000
Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a 45% tax rate for 2006 and 2007 and a 40% tax rate for the remaining years.
Prepare the journal entries for the years 2008 to 2012 to record income tax expense and the effects of the net operating loss carrybacks and carryforwards assuming Synergetics Company uses the carryback provision. All income and losses relate to normal operations.( In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.)
P19-1 (Three Differences, No Beginning Deferred Taxes, Multiple Rates)
The following information is available for Remmers Corporation for 2010.
1. Depreciation reported on the tax return exceeded depreciation reported on the income statement by $120,000. This difference will reverse in equal amounts of $30,000 over the years 2011-2014.
2. Interest received on municipal bonds was $10,000.
3. Rent collected in advance on January 1, 2010, totaled $60,000 for a 3-year period. Of this amount, $40,000 was reported as unearned at December 31, for book purposes.
4. The tax rates are 40% for 2010 and 35% for 2011 and subsequent years.
5. Income taxes of $320,000 are due per the tax return for 2010.
6. No deferred taxes existed at the beginning of 2010.
a) Compute taxable income for 2010.
b) Compute pretax financial income for 2010.
c) Prepare the journal entries to record income tax expense, deferred income taxes, and income taxes payable for 2010 and 2011. Assume taxable income was $980,000 in 2011. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)
d) Prepare the income tax expense section of the income statement for 2010, beginning with “Income before income taxes.”
P19-3 (Second Year of Depreciation Difference, Two Differences, Single Rate, Extraordinary Item)
The following information has been obtained for the Gocker Corporation.
1. Prior to 2010, taxable income and pretax financial income were identical.
2. Pretax financial income is $1,700,000 in 2010 and $1,400,000 in 2011.
3. On January 1, 2010, equipment costing $1,200,000 is purchased. It is to be depreciated on a straight-line basis over 5 years for tax purposes and over 8 years for financial reporting purposes. (Hint: Use the half-year convention for tax purposes, as discussed in Appendix 11A.)
4. Interest of $60,000 was earned on tax-exempt municipal obligations in 2011.
5. Included in 2011 pretax financial income is an extraordinary gain of $200,000, which is fully taxable.
6. The tax rate is 35% for all periods.
7. Taxable income is expected in all future years.
a) Compute taxable income and income tax payable for 2011.
b) Prepare the journal entry to record 2011 income tax expense, income tax payable, and deferred taxes. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)
c) Prepare the bottom portion of Gocker's 2011 income statement, beginning with “Income before income taxes and extraordinary item.”
d) Indicate how deferred income taxes should be presented on the December 31, 2011, balance sheet.
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