Temporary Difference; Taxable Income Given

Exercises

Exercise 16-1

Temporary difference; taxable income given

LO1

Text: E 16-1

Stancil Industries reports pretax accounting income of $80 million, but due to a single temporary difference, taxable income is only $50 million. At the beginning of the year, no temporary differences existed.

Required:

Assuming a tax rate of 35%, prepare the appropriate journal entry to record Stancil’s income taxes.

Exercise 16-2

Temporary difference; income tax payable given

LO2

Text: E 16-4

In 2011, Lambert Services collected rent revenue for 2012 tenant occupancy. For income tax reporting, the rent is taxed when collected. For financial statement reporting, the rent is recognized as income in the period earned. The unearned portion of the rent collected in 2011 amounted to $90,000 at December 31, 2011. Lambert had no temporary differences at the beginning of the year.

Required:

Assuming an income tax rate of 40%, and that the 2011 income tax payable is $285,000, prepare the journal entry to record income taxes for 2011.

Exercise 16-3

Deferred tax asset; taxable income given; previous balance in valuation allowance

LO2 LO3

Text: E 16-11

At the end of 2010, Mathis Industries had a deferred tax asset account with a balance of $120 million attributable to a temporary book-tax difference of $300 million in a liability for estimated expenses. At the end of 2011, the temporary difference is $280 million. Mathis has no other temporary differences. Taxable income for 2011 is $720 million and the tax rate is 40%.

Mathis has a valuation allowance of $40 million for the deferred tax asset at the beginning of 2011.

Required:

1.Prepare the journal entry(s) to record Mathis’s income taxes for 2011 assuming it is “more likely than not” that the deferred tax asset will be realized.

2.Prepare the journal entry(s) to record Mathis’s income taxes for 2011 assuming it is “more likely than not” that one-half of the deferred tax asset will not ultimately be realized.

Exercise 16-4

Multiple differences; calculate taxable income

LO1 LO4

Text: E 16-13

Fessler Transport began operations in January 2011, and purchased a delivery truck for $160,000. Fessler plans to use straight-line depreciation over a four-year expected useful life for financial reporting purposes. For tax purposes, the deduction is 50% of cost in 2011, 30% in 2012 and 20% in 2013. Pretax accounting income for 2011 was $900,000, which includes interest revenue of $160,000 from municipal bonds. The enacted tax rate is 40%.

Required:

Assuming no differences between accounting income and taxable income other than those described above:

1.Prepare the journal entry to record income taxes in 2011.

2.What is Fessler’s 2011 net income?

Exercise 16-5

Intraperiod tax allocation

LO10

Text: E 16-29

The following income statement does not reflect intraperiod tax allocation.

Income Statement

For the fiscal year ended June 30, 2011

($ in millions)

Revenues $415

Cost of goods sold (175)

Gross profit $240

Operating expenses (90)

Income tax expense (42)

Income before discontinued operations and extraordinary item $108

Loss from discontinued operations (40)

Extraordinary casualty loss (5)

Net income $ 63

The company’s tax rate is 40%.

Required:

Recast the income statement to reflect intraperiod tax allocation.

Problems

Problem 16-1

Change in tax rate; single temporary difference

LO5

Text: P 16-3

Commercial Development began operations in December 2011. When lots for industrial development are sold, Commercial recognizes income for financial reporting purposes in the year of the sale. For some lots, Commercial recognizes income for tax purposes when collected. Income recognized for financial reporting purposes in 2011 for lots sold this way was $48 million which will be collected over the next three years. Scheduled collections for 2012-2014 are as follows:

2012 $ 16 million

2013 20 million

2014 12 million

$48 million

Pretax accounting income for 2011 was $68 million. The enacted tax rate is 40 percent.

Required:

1.Assuming no differences between accounting income and taxable income other than those described above, prepare the journal entry to record income taxes in 2011.

2.Suppose a new tax law, revising the tax rate from 40% to 35%, beginning in 2013, is enacted in 2012, when pretax accounting income was $60 million. Prepare the appropriate journal entry to record income taxes in 2012.

3.If the new tax rate had not been enacted, what would have been the appropriate balance in the deferred tax liability account at the end of 2012? Why?

Problem 16-2

Operating loss carryback and carryforward; temporary difference; permanent difference

LO2 LO4 LO7

Text: P 16-10

CPS Corporation reported a pretax operating loss of $540,000 for financial reporting purposes in 2011. Contributing to the loss were (a) a penalty of $20,000 assessed by the Environmental Protection Agency for violation of a federal law and paid in 2011 and (b) an estimated loss of $40,000 from accruing a loss contingency. The loss will be tax deductible when paid in 2012.

The enacted tax rate is 40%. There were no temporary differences at the beginning of the year and none originating in 2011 other than those described above. Taxable income in CPS’s two previous years of operation was as follows:

2009 300,000
2010 120,000

Required:

1.Prepare the journal entry to recognize the income tax benefit of the operating loss in 2011. CPS elects the carryback option.

2.Show the lower portion of the 2011 income statement that reports the income tax benefit of the operating loss.

3.Prepare the journal entry to record income taxes in 2012 assuming pretax accounting income is $240,000. No additional temporary differences originate in 2012.

Alternate Exercises and Problems16-1 13-1