Advanced Financial Accounting
Accounting for Income Tax
E19-4 (Three Differences, Compute Taxable Income, Entry for Taxes)
Havaci Company reports pretax financial income of $80,000 for 2012. The following items cause taxable income to be
different than pretax financial income.
1. Depreciation on the tax return is greater than depreciation on the income statement by $16,000.
2. Rent collected on the tax return is greater than rent earned on the income statement by $27,000.
3. Fines for pollution appear as an expense of $11,000 on the income statement.
Havaci’s tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no
deferred taxes at the beginning of 2012.
Instructions
(a) Compute taxable income and income taxes payable for 2012.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2012.
(c) Prepare the income tax expense section of the income statement for 2012, beginning with the line “Income before income
taxes.”
(d) Compute the effective income tax rate for 2012.
E19-5 (Two Temporary Differences, One Rate, Beginning Deferred Taxes) The following facts relate to Alschuler
Corporation.
1. Deferred tax liability, January 1, 2012, $40,000.
2. Deferred tax asset, January 1, 2012, $0.
3. Taxable income for 2012, $115,000.
4. Pretax financial income for 2012, $200,000.
5. Cumulative temporary difference at December 31, 2012, giving rise to future taxable amounts, $220,000.
6. Cumulative temporary difference at December 31, 2012, giving rise to future deductible amounts, $35,000.
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 2012.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2012.
(c) Prepare the income tax expense section of the income statement for 2012, beginning with the line “Income before income
taxes.”
E19-8 (Two Temporary Differences, One Rate, 3 Years)
Gordon Company has two temporary differences between its pretax financial income and taxable income. The information is
shown below.
The income tax rate for all years is 40%.
Instructions
(a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2012, 2013,
and 2014.
(b) Assuming there were no temporary differences prior to 2012, indicate how deferred taxes will be reported on the 2014
balance sheet. Gordon’s product warranty is for 12 months.
(c) Prepare the income tax expense section of the income statement for 2014, beginning with the line “Pretax financial
income.”
E19-10 (Two NOLs, No Temporary Differences, No Valuation Account, Entries and Income Statement)
Lanier Corporation has pretax financial income (or loss) equal to taxable income (or loss) from 2005 through 2013 as follows.
Income (Loss) Tax Rate
2005 $29,000 30%
2006 40,000 30%
2007 22,000 35%
2008 48,000 50%
2009 (150,000) 40%
2010 90,000 40%
2011 30,000 40%
2012 105,000 40%
2013 (50,000) 45%
Pretax financial income (loss) and taxable income (loss) were the same for all years since Lanier 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.
Instructions
(a) What entry(ies) for income taxes should be recorded for 2009?
(b) Indicate what the income tax expense portion of the income statement for 2009 should look like. Assume all income (loss)
relates to continuing operations.
(c) What entry for income taxes should be recorded in 2010?
(d) How should the income tax expense section of the income statement for 2010 appear?
(e) What entry for income taxes should be recorded in 2013?
(f) How should the income tax expense section of the income statement for 2013 appear?
E19-12 (Two Temporary Differences, One Rate, Beginning Deferred Taxes, Compute Pretax Financial
Income) The following facts relate to McKane Corporation.
1. Deferred tax liability, January 1, 2012, $60,000.
2. Deferred tax asset, January 1, 2012, $20,000.
3. Taxable income for 2012, $115,000.
4. Cumulative temporary difference at December 31, 2012, giving rise to future taxable amounts, $210,000.
5. Cumulative temporary difference at December 31, 2012, giving rise to future deductible amounts, $95,000.
6. Tax rate for all years, 40%. 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 2012.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2012.
(c) Prepare the income tax expense section of the income statement for 2012, beginning with the line “Income before income
taxes.”
(d) Compute the effective tax rate for 2012.
E19-13 (One Difference, Multiple Rates, Effect of Beginning Balance versus No Beginning Deferred
Taxes) At the end of 2012, Wasicsko Company has $180,000 of cumulative temporary differences that will result in reporting
future taxable amounts as follows.
Tax rates enacted as of the beginning of 2011 are:
2011 and 2012 40%
2013 and 2014 30%
2015 and later 25%
Wasicsko’s taxable income for 2012 is $340,000. Taxable income is expected in all future years.
Instructions
(a) Prepare the journal entry for Wasicsko to record income taxes payable, deferred income taxes, and income tax expense for
2012, assuming that there were no deferred taxes at the end of 2011.
(b) Prepare the journal entry for Wasicsko to record income taxes payable, deferred income taxes, and income tax expense for
2012, assuming that there was a balance of $22,000 in a Deferred Tax Liability account at the end of 2011.
E19-19 (Two Differences, One Rate, Beginning Deferred Balance, Compute Pretax Financial Income)
Shamess Co. establishes a $90 million liability at the end of 2012 for the estimated litigation settlement for manufacturing
defects. All related costs will be paid and deducted on the tax return in 2013. Also, at the end of 2012, the company has $50
million of temporary differences due to excess depreciation for tax purposes, $7 million of which will reverse in 2013.
The enacted tax rate for all years is 40%, and the company pays taxes of $64 million on $160 million of taxable income in
2012. Shamess expects to have taxable income in 2013.
Instructions
(a) Determine the deferred taxes to be reported at the end of 2012.
(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 2012 was a deferred tax liability of $10,000,000, draft the
income tax expense portion of the income statement for 2012, beginning with the line “Income before income taxes.” (Hint:
You must first compute (1) the amount of temporary difference underlying the beginning $10,000,000 deferred tax liability,
then (2) the amount of temporary differences originating or reversing during the year, then (3) the amount of pretax financial
income.)
E19-23 (NOL Carryback and Carryforward, Valuation Account versus No Valuation Account)
Sondgeroth Inc. reports the following pretax income (loss) for both financial reporting purposes and tax purposes. (Assume
the carryback provision is used for a net operating loss.)
Book Basis Tax Basis
Accounts receivable $50,000 $–0–
Litigation liability 20,000 –0–
The tax rates listed were all enacted by the beginning of 2011.
Instructions
(a) Prepare the journal entries for the years 2011–2014 to record income tax expense (benefit),income taxes payable
(refundable), and the tax effects of the loss carryback and carryforward, assuming that at the end of 2013 the benefits of the
loss carryforward are judged more likely than not to be realized in the future.
(b) Using the assumption in (a), prepare the income tax section of the 2013 income statement, beginning with the line
“Operating loss before income taxes.”
(c) Prepare the journal entries for 2013 and 2014, assuming that based on the weight of available evidence, it is more likely
than not that one-fourth of the benefits of the loss carryforward will not be realized.
(d) Using the assumption in (c), prepare the income tax section of the 2013 income statement, beginning with the line
“Operating loss before income taxes.”
P19-1 (Three Differences, No Beginning Deferred Taxes, Multiple Rates) The following information is available for
Remmers Corporation for 2012.
1. Depreciation reported on the tax return exceeded depreciation reported on the income statement by $120,000. This
difference will reverse in equal amounts of $30,000 over the years 2013–2016.
2. Interest received on municipal bonds was $10,000.
3. Rent collected in advance on January 1, 2012, totaled $60,000 for a 3-year period. Of this amount, $40,000 was reported as
unearned at December 31, 2012, for book purposes.
4. The tax rates are 40% for 2012 and 35% for 2013 and subsequent years.
5. Income taxes of $320,000 are due per the tax return for 2012.
6. No deferred taxes existed at the beginning of 2012.
Instructions
(a) Compute taxable income for 2012.
(b) Compute pretax financial income for 2012.
(c) Prepare the journal entries to record income tax expense, deferred income taxes, and income taxes payable for 2012 and
2013. Assume taxable income was $980,000 in 2013.
(d) Prepare the income tax expense section of the income statement for 2012, beginning with “Income before income taxes.”
P19-3 (Second Year of Depreciation Difference, Two Differences, Single Rate, Extraordinary Item) The following
information has been obtained for the Gocker Corporation.
1. Prior to 2012, taxable income and pretax financial income were identical.
2. Pretax financial income is $1,700,000 in 2012 and $1,400,000 in 2013.
3. On January 1, 2012, equipment costing $1,200,000 is purchased. It is to be depreciated on a straight line basis over 5 years
for tax purposes and over 8 years for financial reporting purposes. (Hint: Use the half-year convention for tax purposes, as
discussed in Appendix 11A.)
4. Interest of $60,000 was earned on tax-exempt municipal obligations in 2013.
5. Included in 2013 pretax financial income is an extraordinary gain of $200,000, which is fully taxable.
6. The tax rate is 35% for all periods.
7. Taxable income is expected in all future years.
Instructions
(a) Compute taxable income and income taxes payable for 2013.
(b) Prepare the journal entry to record 2013 income tax expense, income taxes payable, and deferred taxes.
(c) Prepare the bottom portion of Gocker’s 2013 income statement, beginning with “Income before income taxes and
extraordinary item.”
(d) Indicate how deferred income taxes should be presented on the December 31, 2013, balance sheet.
P19-5 (NOL without Valuation Account) Jennings Inc. reported the following pretax income (loss) and related tax rates
during the years 2008–2014.
Pretax financial income (loss) and taxable income (loss) were the same for all years since Jennings began business. The tax
rates from 2011–2014 were enacted in 2011.
Instructions
(a) Prepare the journal entries for the years 2012–2014 to record income taxes payable (refundable), income tax expense
(benefit), and the tax effects of the loss carryback and carryforward. Assume that Jennings elects the carryback provision
where possible and expects to realize the benefits of any loss carryforward in the year that immediately follows the loss year.
(b) Indicate the effect the 2012 entry (IES) has on the December 31, 2012, balance sheet.
(c) Prepare the portion of the income statement, starting with “Operating loss before income taxes,” for 2012.
(d) Prepare the portion of the income statement, starting with “Income before income taxes,” for 2013.
