In 2017, XYZ Corporation has $75,000 of income before taxes inits accounting records. In computing income taxexpense, XYZ makes the following observations of differencesbetween the accounting records and the tax return:
An accelerated depreciation method is used for tax purposes. In2017, XYZ reports $6,000 more depreciation expense for tax purposesthan it shows in the accounting records.
In 2017, XYZ collected $60,000 from a business that is renting aportion of its warehouse. The $60,000 covers the rental payment forthe four years 2018-2022, and therefore no rental revenue has beenrecognized for 2017. However, XYZ must pay taxes on the entireamount collected in 2017.
The enacted tax rate in 2017 is 35%. In 2018, a new tax rate isenacted, changing the rate from 35% to 22% for years beginningJanuary 1, 2019.
Required:
A. Calculatetaxable income for 2017.
B. Preparethe journal entry necessary to record income taxes at the end of2017.
C. How wouldany deferred tax amounts be reported on a classified balancesheet?
D. Assumethat XYZâs 2018 pretax accounting income is $9,000 and that XYZreports $3,000 more depreciation expense for tax purposes than itshows in the accounting records. Also during 2018, XYZ invests intax-free municipal bonds that earn $3,000 interest in 2018. Preparethe journal entry necessary to record income taxes at the end of2018.
E. Show the Income before IncomeTaxes, the appropriate presentation of income tax expense, and theamount of net income or loss that XYZ would report on its 2018income statement.
In 2017, XYZ Corporation has $75,000 of income before taxes inits accounting records. In computing income taxexpense, XYZ makes the following observations of differencesbetween the accounting records and the tax return:
An accelerated depreciation method is used for tax purposes. In2017, XYZ reports $6,000 more depreciation expense for tax purposesthan it shows in the accounting records.
In 2017, XYZ collected $60,000 from a business that is renting aportion of its warehouse. The $60,000 covers the rental payment forthe four years 2018-2022, and therefore no rental revenue has beenrecognized for 2017. However, XYZ must pay taxes on the entireamount collected in 2017.
The enacted tax rate in 2017 is 35%. In 2018, a new tax rate isenacted, changing the rate from 35% to 22% for years beginningJanuary 1, 2019.
Required:
A. Calculatetaxable income for 2017.
B. Preparethe journal entry necessary to record income taxes at the end of2017.
C. How wouldany deferred tax amounts be reported on a classified balancesheet?
D. Assumethat XYZâs 2018 pretax accounting income is $9,000 and that XYZreports $3,000 more depreciation expense for tax purposes than itshows in the accounting records. Also during 2018, XYZ invests intax-free municipal bonds that earn $3,000 interest in 2018. Preparethe journal entry necessary to record income taxes at the end of2018.
E. Show the Income before IncomeTaxes, the appropriate presentation of income tax expense, and theamount of net income or loss that XYZ would report on its 2018income statement.
Related questions
The long-term liabilities section of CPS TransportationâsDecember 31, 2017, balance sheet included the following: (FV of $1,PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)(Use appropriate factor(s) from the tablesprovided.)
a. A lease liability with 13 remaining lease payments of $16,000each, due annually on January 1:
| Lease liability | $ | 113,654 | |
| Less: current portion | 4,635 | ||
| $ | 109,019 | ||
The incremental borrowing rate at the inception of the lease was11% and the lessorâs implicit rate, which was known by CPSTransportation, was 10%.
b. A deferred income tax liability due to a single temporarydifference. The only difference between CPS Transportationâstaxable income and pretax accounting income is depreciation on amachine acquired on January 1, 2017, for $580,000. The machineâsestimated useful life is five years, with no salvage value.Depreciation is computed using the straight-line method forfinancial reporting purposes and the MACRS method for tax purposes.Depreciation expense for tax and financial reporting purposes for2018 through 2021 is as follows:
| MACRS | Straight-line | ||||||||
| Year | Depreciation | Depreciation | Difference | ||||||
| 2018 | $ | 182,000 | $ | 116,000 | $ | 66,000 | |||
| 2019 | 91,000 | 116,000 | (25,000 | ) | |||||
| 2020 | 81,000 | 116,000 | (35,000 | ) | |||||
| 2021 | 71,000 | 116,000 | (45,000 | ) | |||||
The enacted federal income tax rates are 35% for 2017 and 40% for2018 through 2021. For the year ended December 31, 2018, CPSâsincome before income taxes was $980,000.
On July 1, 2018, CPS Transportation issued $680,000 of 9% bonds.The bonds mature in 10 years and interest is payable each January 1and July 1. The bonds were issued at a price to yield the investors10%. CPS records interest at the effective interest rate.
Required:
1. Determine CPS Transportationâs income taxexpense and net income for the year ended December 31, 2018.
2. Determine CPS Transportationâs interest expensefor the year ended December 31, 2018.
3. Prepare the long-term liabilities section ofCPS Transportation's December 31, 2018, balance sheet.
Sherrod, Inc., reported pretax accounting income of $68 millionfor 2016. The following information relates to differences betweenpretax accounting income and taxable income: |
| a. | Income from installment sales of properties included in pretaxaccounting income in 2016 exceeded that reported for tax purposesby $6 million. The installment receivable account at year-end had abalance of $8 million (representing portions of 2015 and 2016installment sales), expected to be collected equally in 2017 and2018. |
| b. | Sherrod was assessed a penalty of $4 million by theEnvironmental Protection Agency for violation of a federal law in2016. The fine is to be paid in equal amounts in 2016 and 2017. |
| c. | Sherrod rents its operating facilities but owns one assetacquired in 2015 at a cost of $56 million. Depreciation is reportedby the straight-line method assuming a four-year useful life. Onthe tax return, deductions for depreciation will be more thanstraight-line depreciation the first two years but less thanstraight-line depreciation the next two years ($ in millions): |
| Income Statement | Tax Return | Difference | |||||||
| 2015 | $ | 14 | $ | 18 | $ | (4 | ) | ||
| 2016 | 14 | 22 | (8 | ) | |||||
| 2017 | 14 | 8 | 6 | ||||||
| 2018 | 14 | 8 | 6 | ||||||
| $ | 56 | $ | 56 | $ | 0 | ||||
| d. | Warranty expense of $5 million is reported in 2016. For taxpurposes, the expense is deducted when costs are incurred, $4million in 2016. At December 31, 2016, the warranty liability was$4 million (after adjusting entries). The balance was $3 million atthe end of 2015. |
| e. | In 2016, Sherrod accrued an expense and related liability forestimated paid future absences of $14 million relating to thecompanyâs new paid vacation program. Future compensation will bedeductible on the tax return when actually paid during the next twoyears ($8 million in 2017; $6 million in 2018). |
| f. | During 2015, accounting income included an estimated loss of $2million from having accrued a loss contingency. The loss is paid in2016 at which time it is tax deductible. |
| Balances in the deferred tax assetand deferred tax liability accounts at January 1, 2016, were $2.0million and $2.4 million, respectively. The enacted tax rate is 40%each year. 1. Determine the amounts necessary to record income taxes for2016 and prepare the appropriate journal entry. 2. What is the 2016 net income? 3. SHow how any deferred tax amounts should be classified andreported in the 2016 balance sheet. |
Sherrod, Inc., reported pretax accounting income of $62 millionfor 2016. The following information relates to differences betweenpretax accounting income and taxable income: |
| a. | Income from installment sales of properties included in pretaxaccounting income in 2016 exceeded that reported for tax purposesby $7 million. The installment receivable account at year-end had abalance of $8 million (representing portions of 2015 and 2016installment sales), expected to be collected equally in 2017 and2018. |
| b. | Sherrod was assessed a penalty of $4 million by theEnvironmental Protection Agency for violation of a federal law in2016. The fine is to be paid in equal amounts in 2016 and 2017. |
| c. | Sherrod rents its operating facilities but owns one assetacquired in 2015 at a cost of $44 million. Depreciation is reportedby the straight-line method assuming a four-year useful life. Onthe tax return, deductions for depreciation will be more thanstraight-line depreciation the first two years but less thanstraight-line depreciation the next two years ($ in millions): |
| Income Statement | Tax Return | Difference | |||||||
| 2015 | $ | 11 | $ | 14 | $ | (3 | ) | ||
| 2016 | 11 | 20 | (9 | ) | |||||
| 2017 | 11 | 6 | 5 | ||||||
| 2018 | 11 | 4 | 7 | ||||||
| $ | 44 | $ | 44 | $ | 0 | ||||
| d. | Warranty expense of $5 million is reported in 2016. For taxpurposes, the expense is deducted when costs are incurred, $3million in 2016. At December 31, 2016, the warranty liability was$3 million (after adjusting entries). The balance was $1 million atthe end of 2015. |
| e. | In 2016, Sherrod accrued an expense and related liability forestimated paid future absences of $14 million relating to thecompanyâs new paid vacation program. Future compensation will bedeductible on the tax return when actually paid during the next twoyears ($8 million in 2017; $6 million in 2018). |
| f. | During 2015, accounting income included an estimated loss of $2million from having accrued a loss contingency. The loss is paid in2016 at which time it is tax deductible. |
Balances in the deferred tax assetand deferred tax liability accounts at January 1, 2016, were $1.2million and $1.6 million, respectively. The enacted tax rate is 40%each year. |
| Required: |
| 1. | Determine the amounts necessary to record income taxes for 2016and prepare the appropriate journal entry. (If no entry isrequired for an event, select "No journal entry required" in thefirst account field. Enter your answers in millions rounded to 1decimal place (i.e., 5,500,000 should be entered as5.5)) | ||||||||||
| Journal Entry Worksheet Record 2016 income taxes.
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