c19BExercises.

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B EXERCISES

2 5 E19-1B (One Temporary Difference, Future Deductible Amounts, One Rate, No Beginning Deferred
Taxes) Allied Corporation has one temporary difference at the end of 2014 that will reverse and cause
deductible amounts of $40,000 in 2015, and $70,000 in 2016. Allied’s pretax financial income for 2014 is
$125,000, and the tax rate is 40% for all years. There are no deferred taxes at the beginning of 2014.

Instructions
(a) Compute taxable income and income taxes payable for 2014.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes
payable for 2014.
(c) Prepare the income tax expense section of the income statement for 2014, beginning with the line
“Income before income taxes.”

2 E19-2B (Two Differences, No Beginning Deferred Taxes, Tracked through 2 Years) The following
information is available for DirectMedia Inc. for 2014.
1. Excess of tax depreciation over book depreciation, $80,000. This $80,000 difference will reverse
equally over the next 4 years.
2. Deferral, for book purposes, of $25,000 of subscription income received in advance. The subscrip-
tion income will be earned in 2015.
3. Pretax financial income, $160,000.
4. Tax rate for all years, 35%.

Instructions
(a) Compute taxable income for 2014.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes
payable for 2014.
(c) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes
payable for 2015, assuming taxable income of $255,000.

2 5 E19-3B (One Temporary Difference, Future Taxable Amounts, One Rate, Beginning Deferred Taxes) At
the beginning of 2014, Krypton Inc. reporting a deferred tax liability of $80,000. At the end of 2014, the
related cumulative temporary difference amounts to $300,000, and it will reverse evenly over the next 4
years. Pretax accounting income for 2014 is $380,000, the tax rate for all years is 40%, and taxable income
for 2014 is $280,000.

Instructions
(a) Compute income taxes payable for 2014.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes
payable for 2014.
(c) Prepare the income tax expense section of the income statement for 2014 beginning with the line
“Income before income taxes.”

2 3 E19-4B (Three Differences, Compute Taxable Income, Entry for Taxes) Metals Corporation reports pre-
tax financial income of $260,000 for 2014. The following items cause taxable income to be different than
5 6 pretax financial income.
1. Rental income on the income statement is less than rent collected on the tax return by $65,000.
2. Depreciation on the tax return is greater than depreciation on the income statement by $40,000.
3. Interest on an investment in a municipal bond of $6,500 on the income statement.
Metal’s tax rate is 40% for all years, and the company expects to report taxable income in all future years.
There are no deferred taxes at the beginning of 2014.

Instructions
(a) Compute taxable income and income taxes payable for 2014.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes
payable for 2014.
(c) Prepare the income tax expense section of the income statement for 2014, beginning with the line
“Income before income taxes.”
(d) Compute the effective income tax rate for 2014.
2 3 E19-5B (Two Temporary Differences, One Rate, Beginning Deferred Taxes) The following facts relate
to Xylo Corporation.
5
1
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2 • Chapter 19 Accounting for Income Taxes

1. Deferred tax liability, January 1, 2012, $0.

2. Deferred tax asset, January 1, 2012, $24,000.
3. Taxable income for 2014, $265,000.
4. Pretax financial income for 2014, $345,000.
5. Cumulative temporary difference at December 31, 2014, giving rise to future taxable amounts, $140,000.
6. Cumulative temporary difference at December 31, 2014, giving rise to future deductible amounts,
$120,000.
7. Tax rate for all years, 40%.
8. The company is expected to operate profitably in the future.
Instructions
(a) Compute income taxes payable for 2014.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes
payable for 2014.
(c) Prepare the income tax expense section of the income statement for 2014, beginning with the line
“Income before income taxes.”
6 E19-6B (Identify Temporary or Permanent Differences) Listed below are items that are commonly
accounted for differently for financial reporting purposes than they are for tax purposes.
Instructions
For each item below, indicate whether it involves:
(1) A temporary difference that will result in future deductible amounts and, therefore, will usually
give rise to a deferred income tax asset.
(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give
rise to a deferred income tax liability.
(3) A permanent difference.
Use the appropriate number to indicate your answer for each.
(a) ______ For some assets, straight-line depreciation is used for tax purposes while double-declining
balance method is used for financial reporting purposes.
(b) ______ Warranty expenses are accrued when the sale is made, but cannot be deducted until the
work is actually performed.
(c) ______ The company uses the percentage of complete method to record revenue on long-term con-
tracts for financial reporting purposes, but the completed contract method is used for tax purposes.
(d) ______ Accelerated depreciation for tax purposes, and the straight-line depreciation method is used
for financial reporting purposes for some equipment.
(e) ______ A landlord collects some rents in advance. Rents received are taxable in the period when
they are received.
(f) ______ Tax-exempt income.
(g) ______ An SEC fine related to financial reporting irregularities.
(h) ______ For financial reporting purposes, an estimated loss from a lawsuit is accrued. The tax re-
turn will not report a deduction until an amount is paid.
(i) ______ A liability for a guarantee is accrued for financial reporting purposes.
(j) ______ Installment sales are accounted for by the accrual method for financial reporting purposes
and the installment method for tax purposes.
2 3 E19-7B (Terminology, Relationships, Computations, Entries)
4 6 Instructions
Complete the following statements by filling in the blanks.
(a) If a $150,000 balance in Deferred Tax Liability was computed by use of a 30% rate, the underlying
cumulative temporary difference amounts to $_______.
(b) An income statement that reports current tax benefit of $63,000 and deferred tax expense of $19,000
will report total income tax ________ of $________.
(c) If a taxable permanent difference originates in 2012, it will cause taxable income for 2012 to be
________ (less than, greater than) pretax financial income for 2012.
(d) If the income statement shows total income tax expense of $186,000 and deferred tax expenses of
$45,000, the total taxes due on the tax return for the period are _______.
(e) If total tax expense is $225,000 and the current expense is $155,000, then the deferred tax _______
(expense, benefit) is $_______.
(f) In a period in which a deductible temporary difference reverses, the reversal will cause taxable in-
come to be _______ (less than, greater than) pretax financial income.
(g) An decrease in the Deferred Tax Assets account on the balance sheet is recorded by a _______
(debit, credit) to the Income Tax Expense account.
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B Exercises • 3

(h) If a corporation’s “Income tax payable” on the balance sheet totals $100,000, the company made
estimated payments during the year totaling $40,000, and the tax rate is 40%, taxable income equals
$________.
(i) A valuation account _______ the balance reported in the balance sheet for a deferred tax asset to
the amount expected to be realized.
(j) Deferred taxes ________ (are, are not) recorded to account for temporary differences.
2 3 E19-8B (Two Temporary Differences, One Rate, 3 Years) Tipper Company has two temporary differ-
ences between its income tax expense and income taxes payable. The following information is available.
5 9
2014 2015 2016
Pretax financial income $225,000 $268,000 $365,000
Excess of depreciation expense on tax return (20,000) (15,000) (20,000)
Excess of warranty expense on financial income 10,000 15,000 16,000
Taxable income $215,000 $268,000 $361,000

The income tax rate for all years is 30%.

Instructions
(a) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax
payable for 2014, 2015, and 2016.
(b) Assuming there were no temporary differences prior to 2014, indicate how deferred taxes will be
reported on the 2015 balance sheet. Tipper’s product warranty is for 12 months.
(c) Prepare the income tax expense section of the income statement for 2015, beginning with the line
“Pretax financial income.”
8 E19-9B (Carryback and Carryforward of NOL, No Valuation Account, No Temporary Differences) The
pretax financial income (or loss) figures for Metals, Inc. are as follows.

2011 $ 90,000
2012 65,000
2013 40,000
2014 (230,000)
2015 70,000
2016 (50,000)
2017 80,000

Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume
a 40% tax rate for 2011 and 2012 and a 35% tax rate for the remaining years.
Instructions
Prepare the journal entries for the years 2014 to 2017 to record income tax expense and the effects of the
net operating loss carrybacks and carryforwards assuming Metals, Inc. uses the carryback provision. All
income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume
that no valuation account is deemed necessary.)
8 E19-10B (Two NOLs, No Temporary Differences, No Valuation Account, Entries and Income State-
ment) Vintage Car Corporation has pretax financial income (or loss) equal to taxable income (or loss)
from 2008 through 2017 as follows.

Income (Loss) Tax Rate

2008 $ 40,000 40%
2009 63,000 40%
2010 36,000 30%
2011 (86,000) 30%
2012 (93,000) 40%
2013 76,000 40%
2014 59,000 50%
2015 (135,000) 50%
2016 96,000 40%
2017 168,000 40%

Pretax financial income (loss) and taxable income (loss) were the same for all years since Vintage Car has
been in business. Assume the carryback provision is employed for net operating losses. In recording the
benefits of a loss carryforward, assume that it is more likely than not that the related benefits will be
realized.
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4 • Chapter 19 Accounting for Income Taxes

Instructions
(a) What entry(ies) for income taxes should be recorded for 2011?
(b) Indicate what the income tax expense portion of the income statement for 2011 should look like.
Assume all income (loss) relates to continuing operations.
(c) What entry for income taxes should be recorded in 2012?
(d) How should the income tax expense section of the income statement for 2012 appear?
(e) What entry for income taxes should be recorded in 2015?
(f) How should the income tax expense section of the income statement for 2015 appear?

2 3 E19-11B (Three Differences, Classify Deferred Taxes) At December 31, 2014, Rockfellow Corp. had a
net deferred tax asset of $50,000. An explanation of the items that compose this balance is as follows.
9
Resulting Balances
Temporary Differences in Deferred Taxes
1. Accrual, for book purposes, of estimated warranty costs.
Warranty costs will be deducted on the tax return when paid. $ 125,000
2. Excess of tax depreciation over book depreciation (110,000)
3. Accrual, for book purposes, of an estimated litigation
settlement expected to be paid in 2016. The loss will
be deducted for tax purposes when paid. 35,000
$ 50,000

In analyzing the temporary differences, you find that $30,000 of the depreciation temporary difference
will reverse in 2015, and $100,000 of the temporary difference due to the warranty costs will reverse in
2015. The tax rate for all years is 40%.

Instructions
Indicate the manner in which deferred taxes should be presented on Rockfellow’s December 31, 2014,
balance sheet.

2 3 E19-12B (Two Temporary Differences, One Rate, Beginning Deferred Taxes, Compute Pretax Financial
Income) The following facts relate to Integrated Products Corporation.
5
1. Deferred tax liability, January 1, 2014, $225,000.
2. Deferred tax asset, January 1, 2014, $162,000.
3. Taxable income for 2014, $386,000.
4. Cumulative temporary difference at December 31, 2014, giving rise to future taxable amounts, $838,000.
5. Cumulative temporary difference at December 31, 2014, giving rise to future deductible amounts,
$965,000.
6. Tax rate for all years, 30%. No permanent differences exist.
7. The company is expected to operate profitably in the future.

Instructions
(a) Compute the amount of pretax financial income for 2014.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes
payable for 2014.
(c) Prepare the income tax expense section of the income statement for 2014, beginning with the line
“Income before income taxes.”
(d) Compute the effective tax rate for 2014.

2 7 E19-13B (One Difference, Multiple Rates, Effect of Beginning Balance versus No Beginning Deferred
Taxes) At the end of 2014, Frontier Corporation has $360,000 of cumulative temporary differences that
will result in reporting future taxable amounts as follows.
2015 $105,000
2016 90,000
2017 75,000
2018 90,000
$360,000

Tax rates enacted as of the beginning of 2013 are:

2013 and 2014 30%
2015 40%
2016 and later 35%

Frontier’s taxable income for 2014 is $605,000. Taxable income is expected in all future years.
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B Exercises • 5

Instructions
(a) Prepare the journal entry for Frontier to record income taxes payable, deferred income taxes, and
income tax expense for 2014, assuming that there were no deferred taxes at the end of 2013.
(b) Prepare the journal entry for Frontier to record income taxes payable, deferred income taxes, and
income tax expense for 2014, assuming that there was a balance of $136,000 in a Deferred Tax
Liability account at the end of 2013.
3 4 E19-14B (Deferred Tax Asset with and without Valuation Account) NovaSci, Inc. has a deferred tax as-
set account with a balance of $255,000 at the end of 2013 due to a single cumulative temporary difference
of $850,000. At the end of 2014 this same temporary difference has decreased to a cumulative amount of
$750,000. Taxable income for 2014 is $650,000. The tax rate is 30% for all years. No valuation account re-
lated to the deferred tax asset is in existence at the end of 2013.
Instructions
(a) Record income tax expense, deferred income taxes, and income taxes payable for 2014, assuming
that it is more likely than not that the deferred tax asset will be realized.
(b) Assuming that it is more likely than not that one-half of the deferred tax asset will not be realized,
prepare the journal entry at the end of 2014 to record the valuation account.
3 4 E19-15B (Deferred Tax Asset with Previous Valuation Account) Assume the same information as E19-14B,
except that at the end of 2013, NovaSci, Inc. had a valuation account related to its deferred tax asset of $125,000.
5
Instructions
(a) Record income tax expense, deferred income taxes, and income taxes payable for 2014, assuming
that it is more likely than not that the deferred tax asset will be realized in full.
(b) Record income tax expense, deferred income taxes, and income taxes payable for 2014, assuming
that it is more likely than not that one-half of the deferred tax asset will be realized.
2 5 E19-16B (Deferred Tax Asset, Change in Tax Rate, Prepare Section of Income Statement) Sky Time Me-
dia Corporation’s only temporary difference at the beginning and end of 2014 is caused by a $2.5 million
7 9
litigation accrual that is expected to be settled in 2016. The related deferred tax asset at the beginning of
the year is $1,000,000. In the third quarter of 2014, a new tax rate of 45% is enacted into law and is sched-
uled to become effective for 2016. Taxable income for 2014 is $7,250,000, and taxable income is expected
in all future years.
Instructions
(a) Determine the amount reported as a deferred tax asset at the end of 2014. Indicate proper
classification(s).
(b) Prepare the journal entry (if any) necessary to adjust the deferred tax asset when the new tax rate
is enacted into law.
(c) Draft the income tax expense portion of the income statement for 2014. Begin with the line “Income
before income taxes.” Assume no permanent differences exist.
2 3 E19-17B (Two Temporary Differences, Tracked through 3 Years, Multiple Rates) Taxable income and
pretax financial income would be identical for Ursula Co. except for its depreciation on equipment pur-
7
chased in 2014 for $500,000 and estimated costs of warranties. The following income computations have
been prepared.
Taxable income 2014 2015 2016
Excess of revenues over expenses
(excluding two temporary differences) $ 265,000 $ 630,000 $ 250,000
Tax Depreciation (125,000) (200,000) (175,000)
Expenditures for warranties (10,000) (50,000) (15,000)
Taxable income $ 130,000 $ 380,000 $ 60,000

Pretax financial income 2014 2015 2016

Excess of revenues over expenses
(excluding two temporary differences) $ 265,000 $ 630,000 $ 250,000
Book depreciation (100,000) (100,000) (100,000)
Estimated cost of warranties (75,000) –0– –0–
Income before taxes $ 90,000 $ 530,000 $ 150,000

The tax rates in effect are: 2014 and 2015, 30%; 2016 and thereafter, 40%. All tax rates were enacted into
law on January 1, 2014. No deferred income taxes existed at the beginning of 2014. Taxable income is
expected in all future years.
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6 • Chapter 19 Accounting for Income Taxes

Instructions
Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable
for 2014, 2015, and 2016.
2 3 E19-18B (Three Differences, Multiple Rates, Future Taxable Income) During 2014, Cumpuinc’s first
year of operations, the company reports pretax financial income at $231,000. Cumpuinc’s enacted tax rate
7
is 40% for 2014 and 2015 and 30% for all later years. Cumpuinc expects to have taxable income in each
of the next 5 years. The effects on future tax returns of temporary differences existing at December 31,
2014, are summarized below.

Future Years
2015 2016 2017 2018 2019 Total
Future taxable (deductible)
amounts:
Warranty costs $(20,000) $(60,000) $(25,000) $(105,000)
Depreciation (20,000) 12,000 12,000 $12,000 $12,000 28,000
Installment sales 60,000 75,000 135,000

Instructions
(a) Complete the schedule below to compute deferred taxes at December 31, 2014.

Future Taxable December 31, 2014

(Deductible) Tax Deferred Tax
Temporary Difference Amounts Rate (Asset) Liability
Warranty costs $(105,000)
Depreciation 28,000
Installment sales 135,000
Totals $

(b) Compute taxable income for 2014.

(c) Prepare the journal entry to record income tax payable, deferred taxes, and income tax expense for
2014.
2 3 E19-19B (Two Differences, One Rate, Beginning Deferred Balance, Compute Pretax Financial
Income) Low4All Stores establishes a $200 million liability at the end of 2014 for the estimated costs to
9
settle a class-action lawsuit alleging discrimination. The settlement is expected to be approved by the
Court in 2015 at which time the settlement will be paid. The company also has $125 million of temporary
differences the end of 2014 due to installment sales. The $125 million will reverse in equal installments
over the next five years.
The enacted tax rate for all years is 40%, and the company has $351 million of taxable income in 2014.
Low4All Stores expects to have taxable income in 2015.

Instructions
(a) Determine the deferred taxes to be reported at the end of 2014.
(b) Indicate how the deferred taxes computed in (a) are to be reported on the balance sheet.
(c) Assuming that the only deferred tax account at the beginning of 2014 was a deferred tax liability
of $60 million; draft the income tax expense portion of the income statement for 2014, beginning
with the line “Income before income taxes.” (Hint: You must first compute (1) the amount of tem-
porary difference underlying the beginning $60 million deferred tax liability, then (2) the amount
of temporary differences originating or reversing during the year, then (3) the amount of pretax fi-
nancial income.)
2 3 E19-20B (Two Differences, No Beginning Deferred Taxes, Multiple Rates) Education Sciences
Company, in its first year of operations, has the following differences between the book basis and tax
9
basis of its assets and liabilities at the end of 2014.
Book Basis Tax Basis
Equipment (net) $800,000 $750,000
Estimated warranty liability 150,000 –0–
It is estimated that the warranty liability will be settled in 2015 ($100,000) and 2016 ($50,000). The differ-
ence in equipment (net) will result in taxable (deductible) amounts of $(200,000) in 2015, $(150,000) in
2016, and $200,000 in 2017 and 2018. The company has taxable income of $350,000 in 2014. As of the be-
ginning of 2014, the enacted tax rate is 40% for 2014 and 2015, and 35% for 2016 and thereafter. Educa-
tion Sciences expects to report taxable income through 2018.
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B Exercises • 7

Instructions
(a) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax
payable for 2014.
(b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2014.

2 3 E19-21B (Two Temporary Differences, Multiple Rates, Future Taxable Income) Jones Clothier Inc. has
two temporary differences at the end of 2014. The first difference stems from installment sales, and the
7 9
second one results from the accrual for costs associated with closing a factory. Jones’s assistant controller
developed a schedule of future taxable and deductible amounts related to these temporary differences as
follows.
2015 2016 2017 2018
Taxable amounts $ 80,000 $80,000 $60,000 $40,000
Deductible amounts (150,000) (60,000)
$ (70,000) $20,000 $60,000 $40,000

As of the beginning of 2014, the enacted tax rate is 40% for 2014 through 2016, and 30% for 2017 through
2019. At the beginning of 2014, the company had no deferred income taxes on its balance sheet. Taxable
income for 2014 is $150,000. Taxable income is expected in all future years.

Instructions
(a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes
payable for 2014.
(b) Indicate how deferred income taxes would be classified on the balance sheet at the end of 2014.

2 3 E19-22B (Two Differences, One Rate, First Year) The differences between the book basis and tax basis
of the assets and liabilities of Host Five Inc. at the end of 2014 are presented below.
9
Book Basis Tax Basis
Accounts receivable $180,000 $–0–
Warranty accrual 120,000 –0–

It is estimated that the warranty accrual will be settled in 2015 ($75,000) and 2016 ($45,000). The differ-
ence in accounts receivable will result in taxable amounts of $60,000 in 2015, 2016, and 2017. The com-
pany has taxable income of $200,000 in 2014 and is expected to have taxable income in each of the following
3 years. Its enacted tax rate is 35% for all years. This is the company’s first year of operations.

Instructions
(a) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax
payable for 2014.
(b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2014.

4 7 E19-23B (NOL Carryback and Carryforward, Valuation Account versus No Valuation Account) Public
Wares Corporation reports the following pretax income (loss) for both financial reporting purposes and
9
tax purposes. (Assume the carryback provision is used for a net operating loss and 2013 is the company’s
first year of operations.)

Year Pretax Income (Loss) Tax Rate

2013 $230,000 40%
2014 (335,000) 40%
2015 (50,000) 35%
2016 265,000 30%

The tax rates listed were all enacted by the beginning of 2013.

Instructions
(a) Prepare the journal entries for the years 2013 through 2016 to record income tax expense (benefit)
and income tax payable (refundable) and the tax effects of the loss carryback and carryforward,
assuming that the benefits of any loss carryforwards are judged more likely than not to be real-
ized in the future.
(b) Prepare the income tax section of the 2014 income statement beginning with the line “Operating
loss before income taxes.”
(c) Prepare the income tax section of the 2015 income statement beginning with the line “Operating
loss before income taxes.”
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8 • Chapter 19 Accounting for Income Taxes

4 7 E19-24B (NOL Carryback and Carryforward, Valuation Account Needed) Assume the same informa-
tion as E19-23B, except that based on the weight of available evidence in 2014, it is more likely than not
8
that 40 percent of the benefits of any loss carryforward will not be realized. In 2015, the benefits of any
loss carryforwards are judged more likely than not to be realized in the future.

Instructions
(a) Prepare the journal entries for the years 2013 through 2016 to record income tax expense (benefit)
and income tax payable (refundable) and the tax effects of the loss carryback and carryforward,.
(b) Prepare the income tax section of the 2014 income statement beginning with the line “Operating
loss before income taxes.”
(c) Prepare the income tax section of the 2015 income statement beginning with the line “Operating
loss before income taxes.”
4 7 E19-25B (NOL Carryback and Carryforward, Valuation Account Needed) Topper Company reported
the following pretax financial income (loss) for the years 2013 through 2017.
8
2013 $ 70,000
2014 45,000
2015 (260,000)
2016 90,000
2017 215,000
Pretax financial income (loss) and taxable income (loss) were the same for all years involved. The enacted
tax rate was 30% for 2013 through 2015, and 35% for 2016 and thereafter. Assume the carryback provision
is used first for net operating losses.

Instructions
(a) Prepare the journal entries for the years 2013 through 2017 to record income tax expense, income
tax payable (refundable), and the tax effects of the loss carryback and loss carryforward, assuming
that based on the weight of available evidence, it is more likely than not that 60 percent of the ben-
efits of the loss carryforward will not be realized.
(b) Prepare the income tax section of the 2015 income statement beginning with the line “Income (loss)
before income taxes.”