Chapter 15: Accounting for Corporate Income Tax

Chapter 16: Accounting for Corporate Income Tax

Assignment 16-4

20x4 20x5 20x6 20x7

Revenues...... $110,000 $124,000 $144,000 $164,000

Expenses...... (80,000) (92,000) (95,000) (128,000)

Depreciation, straight line...... (10,000) (10,000) (10,000) (10,000)

Pretax accounting income (given) 20,000 22,000 39,000 26,000

Temporary differences for depreciation:

Add accounting depreciation

expense...... 10,000 10,000 10,000 10,000

Less capital cost allowance.. (16,000) (12,000) (8,000) (4,000)

Net temporary difference...... (6,000) (2,000) 2,000 6,000

Taxable income...... $ 14,000 $ 20,000 $ 41,000 $ 32,000

Computation of income tax payable:

Taxable income...... $ 14,000 $ 20,000 $ 41,000 $ 32,000

Income tax rate...... × .40 × .40 × .40 × .40

Income tax payable...... $ 5,600 $ 8,000 $ 16,400 $ 12,800

Deferred income tax, balance sheet

Net temporary differences (see req 1) (6,000) (2,000) 2,000 6,000

Tax rate...... 40 .40 .40 .40

Change in period...... (2,400) (800) 800 2,400

Cumulative balance in DIT.... (2,400) cr. (3,200) cr. (2,400) cr. ____0

A table can also be used for calculations:

Tax Carrying TempDeferred Op. Bal. Adjustment

(in 000's) Basis ValueDiff Tax

20x4 40%

Cap.Assets $ 24 $ 30 $(6) $ (2.4)0$ (2.4)

20x5 40%

Cap.Assets 12 20 (8) (3.2)(2.4) (.8)

20x6 40%

Cap.Assets 4 10 (6) (2.4) (3.2) .8

20x7 40%

Cap.Assets 0 0 0 0 (2.4) 2.4

Income tax expense, liability method of tax allocation:

20x4 20x5 20x6 20x7

Income tax expense:

Income tax payable...... $5,600 $8,000 $16,400 $12,800

Temporary differences...... 2,400 800 (800) (2,400)

$8,000 $8,800 $15,600 $10,400

Net income, liability method of tax allocation

20x4 20x5 20x6 20x7

Pre-tax...... $20,000 $22,000 $39,000 $26,000

Income tax expense...... 8,000 8,800 15,600 10,400

$12,000 $13,200 $23,400 $15,600

Assignment 16-13

Income tax payable:

20x420x520x6

Accounting income $550,000 $123,000 $310,000

Temporary difference (300,000) 150,000 150,000

Taxable income 250,000 273,000 460,000

Tax rate .30 .35 .42

Income tax payable $75,000 $95,550 $193,200

Income tax expense:

20x420x520x6

Income tax payable (above) $75,000 $95,550 $193,200

Change in deferred income tax

See calculations, below 90,000 (37,500) (52,500)

Income tax expense $165,000 $58,050 $140,700

Deferred income tax liability balance $ 90,000 cr. $52,500 cr. None

Deferred income tax:

TaxAccountingTemporaryDeferredOpeningAdjustment

BasisBasisDifferenceTaxBalance

20x4

Accounts receivable 0 $300,000 ($300,000) ($90,000) 0 ($90,000)

20x5

Accounts receivable 0 150,000 (150,000) (52,500) (90,000) 37,500

20x6

Accounts receivable 0 0 0 0 (52,500) 52,500

Assignment 16-14

Requirement 1

This is a temporary difference because (a) pretax accounting income and taxable income are different for each year, and (b) the difference will reverse in subsequent years.

Requirement 2

20x4 20x5 20x6 20x7

Accounting net book value $90,000 $60,000 $30,000 $0

Tax basis (UCC) 72,000 36,000 12,000 0

Requirement 3

Accounting and taxable income 20x4 through 20x7:

20x4 20x5 20x6 20x7

Pretax income (excluding depreciation) $60,000 $80,000 $70,000 $70,000

Depreciation 30,000 30,000 30,000 30,000

Income before tax 30,000 50,000 40,000 40,000

Add back depreciation 30,000 30,000 30,000 30,000

Deduct depreciation for tax purposes (given):

20x4 $(48,000)

20x5 $(36,000)

20x6 $(24,000)

20x7 ______$(12,000)

Taxable income 12,000 44,000 46,000 58,000

Tax rate 30% 30% 40% 40%

Income tax payable $ 3,600 $13,200 $18,400 $23,200

Income tax expense:

Income tax payable $ 3,600 $13,200 $18,400 $23,200

Change in deferred income tax 5,400 1,800 0 (7,200)

Income tax expense $9,000 $15,000 $18,400 $16,000

TaxAccountingTemporaryDeferredOpeningAdjustment

BasisBasisDifferenceTaxBalance

20x4

Capital asset $72,000 $90,000 $(18,000) $(5,400) $0 $(5,400)

20x5

Capital asset $36,000 $60,000 (24,000) (7,200) $(5,400) (1,800)

20x6

Capital asset $12,000 $30,000 (18,000) (7,200) (7,200) 0

20x7

Capital asset 0 0 0 0 (7,200) 7,200

Journal entries

20x420x520x620x7

Income tax expense9,00015,00018,40016,000

Deferred income tax5,4001,800--7,200

Income tax payable3,60013,20018,40023,200

Statement of Financial Position

Long-term liabilities:

Deferred income tax liability$5,400$7,200$7,200 None

Assignment 15-24

20x3 20x4 20x5

Net income before tax...... $75,000 $ 90,000 $80,000

Timing differences:

Warranty: expense...... 60,000

tax deduction...... (15,000) (20,000) (25,000)

Franchise: accounting fee revenue...... (90,000)

fees for tax purposes...... 9,000 51,000 30,000

Taxable income...... $39,000 $121,000 $85,000

Income tax payable (38%, 40%, 45%)...... $14,820 $48,400 $38,250

Income tax expense:

Income tax payable...... $14,820 $48,400 $38,250

Change in deferred income tax (see schedule) 13,680 (11,680) (2,000)

Income tax expense...... $28,500 $36,720 $36,250

Deferred income tax:

TaxAccountingTemporaryDeferred taxOpeningAdjustment

BasisBasisDifference(Liab)/AssetBalance

20x3 (38%)

Warranty $0 ($45,000) $45,000 $17,100 $0 $17,100

Franchise 0 81,000 (81,000) (30,780) 0 (30,780)

(13,680)

20x4 (40%)

Warranty 0 (25,000) 25,000 10,000 17,100 (7,100)

Franchise 0 30,000 (30,000) (12,000) (30,780) 18,780

11,680

20x5 (45%)

Warranty 0 0 0 0 10,000 (10,000)

Franchise 0 0 0 0 (12,000) 12,000

2,000

Entries:

20x3Income tax expense ...... 28,500

Deferred income tax—warranty...... 17,100

Deferred income tax—franchise..... 30,780

Income tax payable...... 14,820

20x4Income tax expense ...... 36,720

Deferred income tax—franchise...... 18,780

Deferred income tax—warranty..... 7,100

Income tax payable...... 48,400

20x5Income tax expense...... 36,250

Deferred income tax—franchise...... 12,000

Deferred income tax—warranty...... 10,000

Income tax payable...... 38,250

Assignment 16-23

20x3 20x4 20x5

Net income before tax...... $75,000 $ 90,000 $80,000

Timing differences:

Warranty: expense...... 60,000

tax deduction...... (15,000) (20,000) (25,000)

Franchise: accounting fee revenue...... (90,000)

fees for tax purposes...... 9,000 51,000 30,000

Taxable income...... $39,000 $121,000 $85,000

Income tax payable (38%, 40%, 45%)...... $14,820 $48,400 $38,250

Income tax expense:

Income tax payable...... $14,820 $48,400 $38,250

Change in deferred income tax (see schedule) 13,680 (11,680) (2,000)

Income tax expense...... $28,500 $36,720 $36,250

Deferred income tax:

TaxAccountingTemporaryDeferred taxOpeningAdjustment

BasisBasisDifference(Liab)/AssetBalance

20x3 (38%)

Warranty $0 ($45,000) $45,000 $17,100 $0 $17,100

Franchise 0 81,000 (81,000) (30,780) 0 (30,780)

(13,680)

20x4 (40%)

Warranty 0 (25,000) 25,000 10,000 17,100 (7,100)

Franchise 0 30,000 (30,000) (12,000) (30,780) 18,780

11,680

20x5 (45%)

Warranty 0 0 0 0 10,000 (10,000)

Franchise 0 0 0 0 (12,000) 12,000

2,000

Entries:

20x3Income tax expense ...... 28,500

Deferred income tax—warranty...... 17,100

Deferred income tax—franchise..... 30,780

Income tax payable...... 14,820

20x4Income tax expense ...... 36,720

Deferred income tax—franchise...... 18,780

Deferred income tax—warranty..... 7,100

Income tax payable...... 48,400

20x5Income tax expense...... 36,250

Deferred income tax—franchise...... 12,000

Deferred income tax—warranty...... 10,000

Income tax payable...... 38,250