ACCTG311 Lecture Notes - Deferred Tax, Deferred Income, Capital Cost Allowance

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violetchinchilla775

8 Apr 2014

School

University of Alberta

Department

Accounting

Course

ACCTG311

Professor

Kristie Dewald

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Document Summary

Deferred income taxes (also referred to as future income taxes ) We have seen before that income calculated for accounting purposes is governed by. Gaap whereas income calculated for tax purposes is governed by tax law. At times, the 2 sets of rules differ. These differences result in a measure of income for tax purposes that is different from income for accounting (net income). There are a number of items that are treated differently for tax than they are for accounting. When we were looking at property, plant and equipment, we discussed that depreciation policies should be determined to best reflect how the asset is used. Tax law, on the other hand has a different set of objectives and provides depreciation methods and rates for capital cost allowance, which is depreciation for tax purposes. Often depreciation for accounting is different from cca for tax.

Related Questions

Information for Entity A for the year ended December 31, 2018 ($ in millions):

Income from continuing operations before tax	$160
Temporary differences (all related to operating income):
Accrued warranty expense in excess of expense included in operating income	12
Depreciation deducted on tax return in excess of depreciation expense	32
Permanent differences (all related to operating income):
Nondeductible portion of entertainment expense	8
Interest received on municipal bonds	3
Balance in deferred tax asset account, January 1, 2018	1
Balance in deferred tax liability account, January 1, 2018	2
The applicable enacted tax rate for all periods is 40%.

Show work.

A. Prepare the appropriate journal entry to record income taxes.

B. What is Entity A's net income?

C. Sometimes a temporary difference will produce future deductible amounts. Explain what is meant by future deductible amounts. Describe at least one situation that has this effect, for example, one example is when rent revenue is collected in advance from tenants (deferred rent revenue for financial accounting purposes) but will be recognized as the tenants occupy the property. You can think of others. How are future deductible amounts recognized in the financial statements? As between deferred tax assets and deferred tax liabilities, which would management prefer and why?

fuchsiaclam765

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.

beigesalmon41

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:

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.

What is the 2016 net income? (Enter your answers inmillions rounded to 1 decimal place (i.e., 5,500,000 should beentered as 5.5))

Show how any deferred tax amounts should be classified andreported in the 2016 balance sheet. (Enter your answers inmillions rounded to 1 decimal place (i.e., 5,500,000 should beentered as 5.5))

3.	Show how any deferred tax amounts should be classified andreported in the 2016 balance sheet. (Enter your answers inmillions rounded to 1 decimal place (i.e., 5,500,000 should beentered as 5.5))

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ACCTG311 Lecture Notes - Deferred Tax, Deferred Income, Capital Cost Allowance

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