ScholarMatic: Explanation & Answer
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Ex. 19-105—Computation of taxable income.
The
records for Bosch Co. show this data for 2011:
·
Gross profit
on installment sales recorded on the books was $360,000. Gross profit from
collections of installment receivables was $270,000.
·
Life
insurance on officers was $3,800.
·
Machinery
was acquired in January for $300,000. Straight-line depreciation over a
ten-year life (no salvage value) is used. For tax purposes, MACRS depreciation
is used and Bosch may deduct 14% for 2011.
·
Interest
received on tax exempt Iowa State bonds was $9,000.
·
The
estimated warranty liability related to 2011 sales was $19,600. Repair costs
under warranties during 2011 were $13,600. The remainder will be incurred in
2012.
·
Pretax
financial income is $600,000. The tax rate is 30%.
Instructions
(a) Prepare a schedule starting with pretax
financial income and compute taxable income.
(b) Prepare the journal entry to record income
taxes for 2011.
19-106—Future taxable and
deductible amounts.
Define temporary differences,
future taxable amounts, and future deductible amounts.
Pole Co. at the end of 2010, its first year of
operations, prepared a reconciliation between pretax financial income and
taxable income as follows:
Pretax financial income $ 420,000
Extra
depreciation taken for tax purposes (1,050,000)
Estimated expenses
deductible for taxes when paid 840,000
Taxable income $ 210,000
Use of the depreciable assets will result in taxable amounts of $350,000
in each of the next three years. The estimated litigation expenses of $840,000 will
be deductible in 2013 when settlement is expected.
Instructions
(a) Prepare
a schedule of future taxable and deductible amounts.
(b) Prepare
the journal entry to record income tax expense, deferred taxes, and income
taxes payable for 2010, assuming a tax rate of 40% for all years.
Hunt Co. at the end of 2010, its first year of operations, prepared a
reconciliation between pretax financial income and taxable income as follows:
Pretax
financial income $ 750,000
Estimated expenses
deductible for taxes when paid 1,200,000
Extra
depreciation
(1,350,000)
Taxable income $ 600,000
Estimated warranty expense of $800,000 will be deductible in 2011,
$300,000 in 2012, and $100,000 in 2013. The use of the depreciable assets will
result in taxable amounts of $450,000 in each of the next three years.
Instructions
(a) Prepare
a table of future taxable and deductible amounts.
(b) Prepare
the journal entry to record income tax expense, deferred income taxes, and
income taxes payable for 2010, assuming an income tax rate of 40% for all
years.
19-109—Recognition of deferred
tax asset.
(a) Describe
a deferred tax asset.
(b) When
should a deferred tax asset be reduced by a valuation allowance?
Listed below are items that are treated differently for
accounting purposes than they are for tax purposes. Indicate whether the items
are permanent differences or temporary differences. For temporary differences,
indicate whether they will create deferred tax assets or deferred tax
liabilities.
1. Investments accounted for by the equity
method.
2. Advance rental receipts.
3. Fine for polluting.
4. Estimated future warranty costs.
5. Excess of contributions over pension
expense.
6. Expenses incurred in obtaining tax-exempt
revenue.
7. Installment sales.
8. Excess tax depreciation over accounting
depreciation.
9. Long-term construction contracts.
10. Premiums paid on life insurance of officers
(company is the beneficiary).
19-111—Permanent and temporary
differences.
Indicate and explain whether each of the following independent situations should be treated as a temporary difference
or a permanent difference.
(a) For
accounting purposes, a company reports revenue from installment sales on the
accrual basis. For income tax purposes, it reports the revenues by the
installment method, deferring recognition of gross profit until cash is
collected.
(b) Pretax accounting income and taxable income
differ because 80% of dividends received from U.S. corporations was deducted
from taxable income, while 100% of the dividends received was reported for
financial statement purposes.
(c) Estimated
warranty costs (covering a three-year warranty) are expensed for accounting
purposes at the time of sale but deducted for income tax purposes when paid.
Ex. 19-112—Temporary differences.
There are four types of temporary differences. For each type: (1)
indicate the cause of the difference, (2) give an example, and (3) indicate
whether it will create a taxable or deductible amount in the future.
Ex.
19-113—Operating loss
carryforward.
In 2010, its first year of operations, Kimble Corp. has a $900,000 net
operating loss when the tax rate is 30%. In 2011, Kimble has $360,000 taxable
income and the tax rate remains 30%.
Instructions
Assume the management of Kimble Corp. thinks that it is more likely than
not that the loss carryforward will not be realized in the near future because
it is a new company (this is before results of 2011 operations are known).
(a) What
are the entries in 2010 to record the tax loss carryforward?
(b) What
entries would be made in 2011 to record the current and deferred income taxes
and to recognize the loss carryforward? (Assume that at the end of 2011 it is
more likely than not that the deferred tax asset will be realized.)
ScholarMatic: Explanation & Answer
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