ACCT 1A Lecture Notes - Lecture 19: Capital Cost Allowance, Deferred Tax, Deferred Income

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magentamuskrat366

9 Aug 2020

School

Irvine Valley College

Department

Accounting

Course

ACCT 1A

Professor

urell

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Document Summary

Separate rules govern the preparation of financial statements (ifrs) and tax returns (income tax act) Some types of revenue are exempt from tax while other types of expenses are not deductible in computing taxable income accounting: income taxes. These permanent differences do not cause much complication in accounting for. However, temporary differences of the following types result in complex. 1) product warranty costs that are recognized as a liability and an expense for financial reporting purposes when the related products are sold, but they are deductible for tax purposes only when payments under the warranty are made. 2) long-lived assets, including development costs, which are usually depreciated by using the straight-line method for financial reporting purposes, are depreciated on an accelerated basis (capital cost allowance) for tax purposes. The differences between depreciation expense and capital cost allowance (cca) are the most common source of temporary differences, which disappear over the long run.

Related Questions

The tax rate is 30%

Cougar has pretax accounting income (PAI) of $66,000 in 2016after including the effects of the appropriate items from thefollowing information:

MACRS (tax) depreciation $20,000

Officerâs life insurance premium expense $15,000

Interest revenue on municipal bonds $25,000

Depreciation taken for financial reporting purposes $38,000

Actual product warranty costs deducted for tax purposes$20,000

Excess of accrual-basis financial accounting sales overcash-basis

sales recognized for tax purposes $11,000

Estimated product warranty expense for financial reporting

Purposes $27,000

At the beginning of 2016, Cougar had a deferred tax liability(DTL) balance of $17,250 which reflected a $41,800 taxabletemporary difference related to depreciation and another $15,700taxable temporary difference related to accrual-basis salesdifferences. Cougar had a deferred tax asset (DTA) balance of$14,850 related to a $49,500 deductible temporary differenceresulting from a warranty liability (obligation under warranty)balance at the beginning of the year. The tax rate for 2016 is 30%,but during 2016, Congress changed the enacted tax rate to 34% forall future tax years beginning in 2017.

Required:

1) Compute Cougarâs taxable income for 2016. What are incometaxes payable for 2016?

2) Prepare Cougarâs journal entry to record income tax expensefor 2016 (assume no

valuation allowance existed as of the beginning of the year andis unnecessary at the end

of the year).

3) What is Cougarâs effective tax rate?

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Cougar has pretax accounting income (PAI) of $66,000 in 2016after including the effects of the appropriate items from thefollowing information:

MACRS (tax) depreciation $20,000

Officerâs life insurance premium expense $15,000

Interest revenue on municipal bonds $25,000

Depreciation taken for financial reporting purposes $38,000

Actual product warranty costs deducted for tax purposes$20,000

Excess of accrual-basis financial accounting sales overcash-basis

sales recognized for tax purposes $11,000

Estimated product warranty expense for financial reporting

Purposes $27,000

Required:

1) Compute Cougarâs taxable income for 2016. What are incometaxes payable for 2016?

2) Prepare Cougarâs journal entry to record income tax expensefor 2016 (assume no

valuation allowance existed as of the beginning of the year andis unnecessary at the end

of the year).

3) What is Cougarâs effective tax rate?

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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?

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ACCT 1A Lecture Notes - Lecture 19: Capital Cost Allowance, Deferred Tax, Deferred Income

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