Homework Week 2 Chapter 19

Problem 1:
California Surplus Inc. qualifies to use the installment-sales method for tax purposes and sold an investment on an installment basis. The total gain of $75000 was reported for financial reporting purposes in the period of sale. The installment period is 3 years; one-third of the sale price is collected in 2012 and the rest in 2013. The tax rate was 35% in 2012, and 30% in 2013 and 30% in 2014. The accounting and tax data is shown below.

Financial Accounting 2012 (35% tax rate) Income before temporary difference Temporary difference Income 2013 (30% tax rate) Income before temporary difference Temporary difference Income 2014 (30% tax rate) Income before temporary difference Temporary difference Income Required: 1) $ $ $ 175,000 75,000 250,000

Tax Return $ $ $ 175,000 25,000 200,000

$ $ $

200,000 200,000

$ $ $

200,000 25,000 225,000

$ $ $

180,000 180,000

$ $ $

180,000 25,000 205,000

Prepare the journal entries to record the income tax expense, deferred income taxes, and the income taxes payable for 2012, 2013, and 2014. No deferred income taxes existed at the beginning of 2012. Explain how the deferred taxes will appear on the balance sheet at the end of each year. (Assume Installment Accounts Receivable is classified as a current asset.) Show the income tax expense section of the income statement for each year, beginning with Income before income taxes.

2)

3)

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Problem 1 Answer:
Answer: 1) Before deferred taxes can be computed, the amount of cumulative temporary difference existing at the end of each year must be computed: 2012 Pretax financial income Taxable income Temporary difference originating (reversing) Cumulative temporary difference (Jan 1) Cumulative temporary difference (Dec 31) Def Tax Liab 2012 Income Tax Expense Income Taxes Payable Deferred Tax Liability $ 250,000 $ 200,000 $50,000 $0 $50,000 17500 87,500 70,000 17,500 2013 $ 200,000 $ 225,000 ($25,000) $50,000 $25,000 7500 2014 $ 180,000 $ 205,000 ($25,000) $25,000 $0 0

2013 Deferred Tax Liability 2,500 Income Tax Expense 2,500 (To record the adjustment for the decrease in the enacted tax rate) Income Tax Expense Deferred Tax Liability Income Taxes Payable 2014 Income Tax Expense Deferred Tax Liability Income Taxes Payable 2) 2012 Current liabilities Deferred tax liability 2013 Current liabilities Deferred tax liability 2014 There is no deferred tax liability to be reported at this date. 60,000 7,500 67,500

54,000 7,500 61,500

$17,500

$7,500

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3) 2012 Income before income taxes Income tax expense Current Deferred Net income 2013 Income before income taxes Income tax expense Current Deferred Adjustment due to decrease tax rate Net income 2014 Income before income taxes Income tax expense Current Deferred Net income $ 180,000 $61,500 -7,500 $ 200,000 $67,500 -7,500 -2,500 $ 250,000 $70,000 17,500

87,500 $ 162,500

57,500 $ 142,500

54,000 $ 126,000

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Problem 2:
The Ambrosia Corporation's lead accountant shows the following info: On Jan 1, 2012, Ambrosia purchased a bottling machine for $800000 A) Straight-line basis depreciation for 5 years for tax purposes (Use the half year convention for tax purposes, as discussed in Applendix 11A). B) Use 8 year useful life for financial reporting C) Tax- exempt municipal bonds yielded interest of $150000 in 2013. D) Pretax financial income is $2300000 in 2012 and $2400000 in 2013. E) The company recognized an extraordinary gain of $150000 in 2013 (which is fully taxable). F) Taxable income is expected in future years with an expected tax rate of 35%. Required: 1) 2) Compute taxable income and income taxes payable for 2013. Prepare the journal entries for income tax expense, income taxes payable, and deferred taxes for 2013. Prepare the deferred income taxes presentation for Dec 31, 2013 balance sheet.

3)

Problem 2 Answer:
Answer: Book Depreciation 2012 2013 2014 2015 2016 2017 2018 2019 Totals $100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 $800,000 $ Tax Depreciation 80,000 160,000 160,000 160,000 160,000 80000 0 0 $800,000 Difference $ 20,000 (60,000) (60,000) (60,000) (60,000) 20,000 100,000 100,000 $0

1)

Pretax financial income for 2013 Nontaxable interest Excess depreciation ($160000 $100000) Taxable income for 2013 Tax rate

$ $ $ $

2,400,000 (150,000) (60,000) 2,190,000 35%

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Income taxes payable for 2013 $ $ 787,500 $ 766,500 14,000 7,000 766,500

2)

Income Tax Expense Income Taxes Payable Deferred Tax Liability Deferred Tax Asset

*Def Tax Asset is sum of 2013-2019 tax-fin depr * tax rate - to reverse prior yr entry **Def Tax Liab is sum of 2014-2019 tax-fin depr * tax rate 3) Long-term liabilities Deferred tax liability 14,000