CLO 3 :- Income Tax Accounting

Exercise 13-3 Determining deferred tax effects (LO13-2, LO13-4)

Mill Company began operations on January 1, 2017, and recognized income from construction-type contracts
under different methods for tax purposes and financial reporting purposes. Information concerning income
recognition under each method is as follows:
 
Year Tax Purposes Book Purposes
2017 $ 400,000  $ 0  
2018   625,000    375,000 
2019   750,000    850,000 

 
Required:
Assume the income tax rate is 35% in all years and that Mill has no other temporary differences. In its
December 31, 2019, balance sheet, what amount of deferred income taxes should Mill report? Indicate
whether the amount is an asset or a liability.

Exercise 13-4 Determining current portion of tax expense (LO13-2, LO13-4, LO13-8)
For the year ended December 31, 2017, Tyre Company reported pre-tax financial statement income of
$750,000. Its taxable income was $650,000. The difference was due to the use of accelerated depreciation for
income tax purposes and straight-line for financial reporting. Tyre’s income tax rate is 35%, and it made
estimated tax payments of $90,000 during 2017.
 
Required:

1. What amount should Tyre report as the current portion of income tax expense for 2017?
2. What amount should Tyre report as the deferred portion of income tax expense for 2017?
3. Prepare the journal entry Tyre would make to record 2017 taxes.

 
Problem 13-1 Calculating deferred tax amounts (LO 13-2, LO 13-4)
Moss Inc. follows GAAP for financial reporting purposes and appropriately uses the installment method of
accounting for income tax purposes. It reported $250,000 of pre-tax income under GAAP, but it will report
the corresponding taxable income in the following years. The enacted tax rate is 35%.
 
  Taxable Income
2016 $ 25,000  
2017   50,000  
2018   75,000  
100,00
2019
  0  

 
The installment income is the firm’s only temporary difference.
 
Required:
What amount should be included as the deferred tax liability in Moss’s December 31, 2016, balance sheet?

Exercise 13-8 Determining deferred tax asset amounts (LO13-2, LO13-4)

Black Company, organized on January 2, 2017, had pre-tax accounting income of $500,000 and taxable
income of $800,000 for the year ended December 31, 2017. The only temporary difference is accrued
product warranty costs, which are expected to be paid as follows:
 
   
2018 $ 100,000 
2019   50,000  
2020   50,000
2021   100,000 

 
Circumstances indicate that it is highly likely that Black will have taxable income in the future. It had no
temporary differences in prior years. The enacted income tax rate is 35%.
 
Required:

1. In Black’s December 31, 2017, balance sheet, how much should the deferred tax asset be?
2. Suppose that as of December 31, 2017, a newly enacted law called for the tax rate to change to 40%,
effective January 1, 2019. Then what would be the amount of the deferred tax asset at December 31,
2017?

Exercise 13-14 Computing deferred tax asset and valuation allowance (LO13-2, LO13-6)
In Figland Company’s first year of operations (2017), the company had pre-tax book income of $500,000 and
taxable income of $800,000. Figland’s only temporary difference is for accrued product warranty costs,
which are expected to be paid as follows:
 
      
2018 $ 100,000 
2019 $ 200,000 

 
The enacted income tax rate is 35%. Figland believes there is a high likelihood that one-third of the tax
benefit associated with the future deductible amounts will not be realized.
 
Required:
Compute the amount of deferred tax asset and related valuation allowance that would be reported in
Figland’s 2017 tax note.

Problem 13-5 Determining current and deferred portion of tax expense and reconciling statutory and
effective tax rates (LO 13-2, LO 13-4, LO 13-8)
Metge Corporation’s worksheet for calculating taxable income for 2017 follows:
 
($ in thousands) 2017
Pre-tax income $ 1,000  
Permanent differences     
Goodwill impairment   400  
Interest on municipal bonds   (200 )
Temporary differences     
Depreciation   (800 )
Warranty costs   400  
Rent received in advance   600  
Taxable income $ 1,400  
 
The enacted tax rate for 2017 is 35%, but it is scheduled to increase to 40% in 2018 and subsequent years.
All temporary differences are originating differences. Metge had no deferred tax assets or deferred tax
liabilities at December 31, 2016.
 
Required:

1. Determine Metge’s 2017 taxes due.

2. What is the change in deferred tax assets (liabilities) for 2017?
3. Determine tax expense for 2017.
4. Provide a schedule that reconciles Metge’s statutory and effective tax rates (in both percentages and
dollar amounts).