Checkers Corporation
Checkers Corporation had a tax liability for 20X7 of $20,000based on a tax rate of 40%, but the accounting staff needs yourhelp in determining the tax expense and deferred tax amounts for20X7. The enacted tax rates for the future periods are 35% for 20X8â 20Y2, and then 30% for 20Y3 â 20Y6. Checkers does not believethat temporary differences can be reasonably projected beyond thoseperiods. The taxable income for 20X8 was $100,000. Checkers alsoowned a 30% interest in Chess, which reported income of $50,000 and$60,000 in 20X7 and 20X8, respectively. Checkers received dividendsof $5,000 and $8,000 from Chess for 20X7 and 20X8, respectively.Checkers expects this pattern of earnings and dividends to continueover the next ten years, if not longer.
Checkers estimated warranty expense to be $7,500 in 20X7 and$10,000 in 20X8. Actual warranty cost for the two years was $6,000and $12,000, respectively. The bad debts expense recognized on theincome statement was $15,000 in 20X7 and $20,000 in 20X8. Actualbad debt write-offs per the tax return were $10,000 in 20X7 and$15,000 in 20X8.
On January 1, 20X8 Checkers also received $30,000 of rent inadvance covering a two-year rental agreement, and $5,000 forinterest income on municipal bonds (classified as held-to-maturitysecurities). The bonds mature in 20Y0.
Depreciation expense calculations for Checkers are asfollows:
Year Cost Recovery Depreciation Year Cost Recovery Depreciation20X7 $24,000 $10,000 20Y2 9,000 10,000 20X8 24,000 10,000 20Y38,500 10,000 20X9 17,000 10,000 20Y4 4,500 10,000 20Y0 12,00010,000 20Y5 ---- 10,000 20Y1 9,000 10,000 20Y6 ---- 10,000 (amountscontinue in next columns) Totals $ 108,000 $ 100,000
Key Terminology
Taxable Income: Income (per IRC) less deductions (per IRC) pertax return Tax Liability: Taxes owed to government per income taxreturn (based on Taxable Income) Net Income: Revenue minus expensesper GAAP Provision for Income Taxes or Income Tax Expense: Anincome statement amount determined based upon thetaxable/deductible GAAP components. Includes the amount currentlypayable per tax return (tax liability) plus/minus any deferredamounts computed per schedules. Deferred Income Taxes: Atheoretical/conceptual liability that will be paid, only if theentity continues to generate a profit
into the future continues as a going concern. Deferred taxes arenot a legal obligation.
Required:
1. Determine the tax expense and the deferred tax amounts for20X7 and 20X8. 2. Determine the tax liability amount for 20X8. 3.Prepare all necessary journal entries for the two year period (20X7â 20X8). 4. Prepare a partial income statement for 20X7 showingearnings before tax, provision for income tax, and net income. Agood example of this format would be schedule M-1 from a corporateincome tax return.
Checkers Corporation
Checkers Corporation had a tax liability for 20X7 of $20,000based on a tax rate of 40%, but the accounting staff needs yourhelp in determining the tax expense and deferred tax amounts for20X7. The enacted tax rates for the future periods are 35% for 20X8â 20Y2, and then 30% for 20Y3 â 20Y6. Checkers does not believethat temporary differences can be reasonably projected beyond thoseperiods. The taxable income for 20X8 was $100,000. Checkers alsoowned a 30% interest in Chess, which reported income of $50,000 and$60,000 in 20X7 and 20X8, respectively. Checkers received dividendsof $5,000 and $8,000 from Chess for 20X7 and 20X8, respectively.Checkers expects this pattern of earnings and dividends to continueover the next ten years, if not longer.
Checkers estimated warranty expense to be $7,500 in 20X7 and$10,000 in 20X8. Actual warranty cost for the two years was $6,000and $12,000, respectively. The bad debts expense recognized on theincome statement was $15,000 in 20X7 and $20,000 in 20X8. Actualbad debt write-offs per the tax return were $10,000 in 20X7 and$15,000 in 20X8.
On January 1, 20X8 Checkers also received $30,000 of rent inadvance covering a two-year rental agreement, and $5,000 forinterest income on municipal bonds (classified as held-to-maturitysecurities). The bonds mature in 20Y0.
Depreciation expense calculations for Checkers are asfollows:
Year Cost Recovery Depreciation Year Cost Recovery Depreciation20X7 $24,000 $10,000 20Y2 9,000 10,000 20X8 24,000 10,000 20Y38,500 10,000 20X9 17,000 10,000 20Y4 4,500 10,000 20Y0 12,00010,000 20Y5 ---- 10,000 20Y1 9,000 10,000 20Y6 ---- 10,000 (amountscontinue in next columns) Totals $ 108,000 $ 100,000
Key Terminology
Taxable Income: Income (per IRC) less deductions (per IRC) pertax return Tax Liability: Taxes owed to government per income taxreturn (based on Taxable Income) Net Income: Revenue minus expensesper GAAP Provision for Income Taxes or Income Tax Expense: Anincome statement amount determined based upon thetaxable/deductible GAAP components. Includes the amount currentlypayable per tax return (tax liability) plus/minus any deferredamounts computed per schedules. Deferred Income Taxes: Atheoretical/conceptual liability that will be paid, only if theentity continues to generate a profit
into the future continues as a going concern. Deferred taxes arenot a legal obligation.
Required:
1. Determine the tax expense and the deferred tax amounts for20X7 and 20X8. 2. Determine the tax liability amount for 20X8. 3.Prepare all necessary journal entries for the two year period (20X7â 20X8). 4. Prepare a partial income statement for 20X7 showingearnings before tax, provision for income tax, and net income. Agood example of this format would be schedule M-1 from a corporateincome tax return.
Related questions
Hamish Ltd needs your assistance incalculating and disclosing the taxation expense for the financialyear ended 30 June 2018. Hamish Ltd has supplied you with anextract from their income statement and from their balance sheet aswell as a list of other information that need to be considered.
Hamish Ltd | |
Income statement for theyear ended 30 June 2018 | $ |
Income | 904,000 |
Revenue from Sales | 850,000 |
Interest Revenue | 18,000 |
Rent Revenue | 36,000 |
Expenses | 647,000 |
Administration and sellingexpenses | 133,000 |
Wages and salary expenses | 250,000 |
Doubtful debts expense | 20,000 |
Goodwill impairment | 20,000 |
Insurance expense | 54,000 |
Depreciation expense - plant | 90,000 |
Long-service leave expenses | 35,000 |
Warrantee expenses | 45,000 |
Net Profit beforetax | 257,000 |
Hamish Ltd | |
Extract from the Balancesheet as at 30 June 2018 | $ |
Assets | |
Cash | 40,000 |
Inventory | 90,000 |
Accounts receivable (net) | 80,000 |
Prepaid insurance | ? |
Interest receivable | 6,000 |
Goodwill | ? |
Plant | ? |
Liabilities | |
Accounts payable | 50,000 |
Wages and salaries owing | 30,000 |
Provision for long-service leaveexpenses | 25,000 |
Rent revenue received inadvance | ? |
Provision for warranteeexpenses | 30,000 |
Loan payable | 200,000 |
The following information relates tothe year ended 30 June 2018. Revenue from sales, including those oncredit terms, is taxable when the sales are made. Administrationand salary expenses are tax deductible when they are incurred. Thisalso applies to wages and salary expenses. The following items thatare included in the financial statements of Hamish Ltd are treateddifferently for accounting and tax purposes:
At year end, accounts receivable owed to Hamish Ltd was $80,000net after the allowance for doubtful debts. Since Hamish Ltdexpects that some of its debtors may be doubtful, it creates anallowance for doubtful debts. The opening balance (on 1 July 2017)of the allowance for doubtful debts was $5,000. The doubtful debtsexpense is not tax deductible until the debtor is actually writtenoff as bad.
The insurance expense amounts to $4,500 per month. During theyear $60,000 was actually paid for insurance and on 30 June 2017$13,500 was prepaid for the 2017 financial year. Insurance expenseis tax deductible when it is paid.
Interest amounting to $12,000 was received during the year andan additional $6,000 was accrued to account for the total interestearned of $18,000 for the year. Interest is taxable when it isreceived.
The plant was acquired on 1 July 2016 at a cost of $500,000. Theplant has an economic life of 5 years with a residual value of$50,000. The straight line method of depreciation is used todepreciate the plant for accounting purposes. For taxationpurposes, the straight line method over 4 years is used tocalculate the depreciation, but only the cost of the plant isdepreciable (ignore the residual for tax purposes).
Hamish Ltd paid an amount of $10,000 during the year in respectof long service leave. In addition an amount of $25,000 had beenaccrued for accounting purposes during the year in respect of longservice leave. Tax deductions for this item are available only whenthe amount is paid. At 30 June 2017 there was no accrual for longservice leave.
During the year $45,000 was received with respect to rentrevenue, of which $36,000 relates to the current year. This is thefirst year that Hamish Ltd received any rent. Rent received istaxable when it is received.
Warrantee expenses incurred amount to $45,000, of which $15,000has been paid by year end. Warrantee expenses are only taxdeductible if they have been paid. At 30 June 2017 there was noaccrual for warrantee expenses.
During the year the goodwill with an opening balance of $100,000was impaired by $20,000. Goodwill impairment is not a deductibleexpense for tax purposes.
At the beginning of the year (i.e., at the 1st of July 2017),total taxable temporary differences amounted to $48,500 and totaldeductible temporary differences amounted to $5,000.
The tax rate was always 33% but changedto 28% during the current year.
Required:
Calculate the deferred taxation that Hamish Ltd should providefor the year ended 30 June 2018. Complete the worksheet for thispurpose. Prepare the journal entries (with narrations) to accountfor Hamish Ltdâs tax expense for the year ended 30 June 2018 inaccordance with NZ IAS 12.
Calculate the taxable income and current tax for Hamish Ltd forthe year ended 30 June 2018. Provide the journal entries that willbe needed to account for current tax for the 2018 financialyear.
Show an extract from the income statement and the notes to theincome statement of Hamish Ltd that clearly shows the requireddisclosure of the tax expense for the year ended 30 June 2018 inaccordance with NZ IAS 12. (9
Hamish Ltd has a deferred tax asset as well as a deferred taxliability at 30 June 2018 in accordance to your calculation thatwould be disclosed in accordance with NZ IAS 12. The financialdirector is concerned with this situation as he argues that the IRDdoes not owe them anything and neither does Hamish owe anything tothe IRD, other than the current tax payable. So why should amountsthat are not currently an asset or liability be disclosed as such?Give a well-reasoned answer to the financial director.
