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Chapter 19: Q11IFRS (page 1115)

Callaway Corp. has a deferred tax asset account with a balance of \(150,000 at the end of 2017 due to a single cumulative temporary difference of \)375,000. At the end of 2018, this same temporary difference has increased to a cumulative amount of \(500,000. Taxable income for 2018 is \)850,000. The tax rate is 40% for all years.

Instructions

(a)Record income tax expense, deferred income taxes, and income taxes payable for 2018, assuming that it is probable that the deferred tax asset will be realized.

(b) Assuming that it is probable that $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2018 to recognize this probability.

Short Answer

Expert verified

a) Income tax expense is debited $290,000, deferred tax asset is debited by $50,000 and income tax payable is credited by $340,000

b) Income tax expense is debited, and deferred tax asset is credited by $30,000, respectively.

Step by step solution

01

Meaning of Income-tax.

A business's tax responsibility to the government in which it operates is known as "income tax payable."

02

(a) Preparing journal entries.

Date

Particulars

Debit ($)

Credit ($)

Income tax expense

290,000

Deferred tax asset

50,000

Income tax payable

340,000

Working notes:

Calculation of income tax payable

Income鈥�tax鈥�payable=Taxable鈥�income脳Enacted鈥�tax鈥�rate=$850,000脳40%=$340,000

Deferred Tax

Date

Cumulative future taxable (Deductible) amount

Taxrate

(Asset)

Liability

12/31/18

$(500,000)

40%

$(200,000)

Deferred tax asset at the end of 2018
$200,000
Deferred tax asset at the beginning of 2018
150,000
Deferred tax benefit for 2018 (increase in deferred tax asset)
(50,000)
Current tax expense for 2018 (Income taxes payable)
340,000
Income tax expense for 2018
$290,000
03

 Step 3: (b) Preparing journal entries.

Date

Particulars

Debit ($)

Credit ($)

Income Tax Expense

30,000

Deferred Tax Asset

30,000

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Most popular questions from this chapter

Oxford Corporation began operations in 2017 and reported pretax financial income of \(225,000 for the year. Oxford鈥檚 tax depreciation exceeded its book depreciation by \)40,000. Oxford鈥檚 tax rate for 2017 and years thereafter is 30%. In its December 31, 2017, balance sheet, what amount of deferred tax liability should be reported?

Presented below are two independent situations related to future taxable and deductible amounts resulting from temporary differences existing at December 31, 2017. 1. Mooney Co. has developed the following schedule of future taxable and deductible amounts. 2018 2019 2020 2021 2022 Taxable amounts \(300 \)300 \(300 \) 300 \(300 Deductible amount 鈥� 鈥� 鈥� (1,600) 鈥� 2. Roesch Co. has the following schedule of future taxable and deductible amounts. 2018 2019 2020 2021 Taxable amounts \)300 \(300 \) 300 \(300 Deductible amount 鈥� 鈥� (2,300) 鈥� Both Mooney Co. and Roesch Co. have taxable income of \)4,000 in 2017 and expect to have taxable income in all future years. The tax rates enacted as of the beginning of 2017 are 30% for 2017鈥�2020 and 35% for years thereafter. All of the underlying temporary differences relate to noncurrent assets and liabilities. Instructions For each of these two situations, compute the net amount of deferred income taxes to be reported at the end of 2017, and indicate how it should be classified on the balance sheet.

Roth Inc. has a deferred tax liability of \(68,000 at the beginning of 2018. At the end of 2018, it reports accounts receivable on the books at \)90,000 and the tax basis at zero (its only temporary difference). If the enacted tax rate is 34% for all periods, and income taxes payable for the period is $230,000, determine the amount of total income tax expense to report for 2018.

Zurich Company reports pretax financial income of \(70,000 for 2017. The following items cause taxable income to be different than pretax financial income. 1. Depreciation on the tax return is greater than depreciation on the income statement by \)16,000. 2. Rent collected on the tax return is greater than rent recognized on the income statement by \(22,000. 3. Fines for pollution appear as an expense of \)11,000 on the income statement. Zurich鈥檚 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 2017. Instructions (a) Compute taxable income and income taxes payable for 2017. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017. (c) Prepare the income tax expense section of the income statement for 2017, beginning with the line 鈥淚ncome before income taxes.鈥� (d) Compute the effective income tax rate for 2017.

The following information was disclosed during the audit of Elbert Inc. 1. Amount Due Year per Tax Return 2017 \(130,000 2018 104,000 2. On January 1, 2017, equipment costing \)600,000 is purchased. For financial reporting purposes, the company uses straight-line depreciation over a 5-year life. For tax purposes, the company uses the elective straight-line method over a 5-year life. (Hint: For tax purposes, the half-year convention as discussed in Appendix 11A must be used.) 3. In January 2018, \(225,000 is collected in advance rental of a building for a 3-year period. The entire \)225,000 is reported as taxable income in 2018, but \(150,000 of the \)225,000 is reported as unearned revenue in 2018 for financial reporting purposes. The remaining amount of unearned revenue is to be recognized equally in 2019 and 2020. 4. The tax rate is 40% in 2017 and all subsequent periods. (Hint: To find taxable income in 2017 and 2018, the related income taxes payable amounts will have to be 鈥済rossed up.鈥�) 5. No temporary differences existed at the end of 2016. Elbert expects to report taxable income in each of the next 5 years. Instructions (a) Determine the amount to report for deferred income taxes at the end of 2017, and indicate how it should be classified on the balance sheet. (b) Prepare the journal entry to record income taxes for 2017. (c) Draft the income tax section of the income statement for 2017, beginning with 鈥淚ncome before income taxes.鈥� (Hint: You must compute taxable income and then combine that with changes in cumulative temporary differences to arrive at pretax financial income.) (d) Determine the deferred income taxes at the end of 2018, and indicate how they should be classified on the balance sheet. (e) Prepare the journal entry to record income taxes for 2018. (f) Draft the income tax section of the income statement for 2018, beginning with 鈥淚ncome before income taxes.鈥�
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