ACCT 4050 Lecture Notes - Lecture 3: Deferred Tax, Income Tax, Tax Basis

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26 Aug 2016

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Document Summary

E16. 1 in comparing taxable income on the federal tax return and pre-tax accounting income on the income statement, are the two amounts usually the same: yes they always must equal, yes they usually equal, no they usually differ. E16. 2 for differences between taxable income and pre-tax accounting income, are the differences temporary or permanent: permanent, temporary c. It depends on the source of the difference. What creates differences between accounting income (gaap) and taxable income (tax law)? (937) A temporary difference between the tax basis of an asset or liability and the book value (reverse over time) creates either a deferred tax liability or deferred tax asset. Deferred tax liability -- taxable income amounts in future years when assets are recovered through collection or use or liabilities settled through payment (temporary differences reverse) Illustration: depreciation is higher in early years on the tax return using macrs compared to gaap. Tax return: higher deductions than income statement depreciation expense.

Related Questions

A. If a $150,000 balance in Deferred Tax Liability was computedby use of a 30% rate, the underlying cumulative temporarydifference amounts to $__________.

B. An income statement that reports current tax benefit of$63,000, and deferred tax expense of $19,000 will report totalincome tax _____________ of$________.

C. If a taxable permanent difference originates in 2012, it willcause taxable income for 2012 tobe _________(less than, greater than) pretax financial income for2012.

D. If the income statement shows total income tax expenses of$186,000 and deferred tax expenses of $45,000, the total taxes dueon the tax return for the period are______________.

E. If total tax expense is $225,000 andthe current expense is $155,000, then the deferred tax_____________ (expense, benefit) is $__________.

F. In a period in which a deductible temporary differencereverses, the reversal will cause taxable income to be __________(less than, greater than) pretax financialincome.

G. A decrease in the Deferred Tax Assets account onthe balance sheet is recorded by a _________ (debit,credit) to the Income Tax Expenseaccount.

H. If a corporationâs âIncome tax payableâ on the balance sheettotals $100,000, the company made estimated payments during theyear totaling $40,000, and the tax rate is 40%, taxable incomeequals $________.

I. A valuation account___________ (reduces, increases) the balance reported in thebalance sheet for a deferred tax asset to the amount expected to berealized.

J. Deferred taxes _________ (are,are not) recorded to account for temporary differences.

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

In preparing Landers financial statements and income tax returnfor 2016, you discovered the following information:

The lease arrangement with Krump was in effect throughout2016;

Landers acquired marketable equity securities for $75,000 during2016. At December 31, 2016, the fair value of the securities was$90,000. Landers classified the securities as trading (hint: onlyrealized gains and losses are reported on the tax return);

Landers earned $26,000 on Washington State bonds in 2016;

The premium on the key-man life insurance policy increased to$33,000 and was paid in early January;

Landers did not acquire any capital assets in 2016;

The founder of Landers died unexpectedly in December, 2016, andthe company received life insurance proceeds of $500,000 in lateDecember.

Landers made additional installment sales in 2016. The gainrecognized on the financial statements and the income tax returnare shown below:

Gainreported on incomestatement Gain realized on tax return

2016 $180,000 $44,000

2017 50,000

2018 50,000

2019 36,000

Landers began estimating its warranty expense in 2016. For 2016,the company estimated

its warranty expense to be $66,000. Actual warranty work done onproducts sold in 2016

was $43,000.

Landers used the direct charge off method of recognizing its baddebts expense in 2015. Customersâ accounts written off in 2015amounted to $9,000. For 2016, Landers estimated its bad debtsexpense to be $15,000. Customersâ accounts written off during 2016amounted to $10,000.

Interest earned on U.S. Treasury bills is 2016 amounted to$18,000.

Additional information for 2016:

Income before incometax $1,425,000

Taxable income on line28 667,000

Taxrate 35%

Estimated income tax payment eachquarter 57,000

For each of the following questions, select the best answer andtype the letter on the answer sheet that follows the questions incapital letters.

Parts A through S involve the reconciliation of pretaxaccounting income to taxable income (schedule M-1) for 2016. Foreach question, indicate the type of difference (temporary

or permanent) and indicate whether the amount of the item isadded or subtracted to determine taxable income for 2016.

A. The unrealized gain related to trading securities purchasedin 2016: