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Chapter 19: Q24E. (page 1101)

Beilman Inc. reports the following pretax income (loss) for both book and tax purposes. (Assume the carryback provision is used where possible for a net operating loss.) Year Pretax Income (Loss) Tax Rate 2015 $120,000 40% 2016 90,000 40 2017 (280,000) 45 2018 120,000 45 The tax rates listed were all enacted by the beginning of 2015.Instructions (a) Prepare the journal entries for years 2015鈥�2018 to record income tax expense (benefit) and income taxes payable (refundable), and the tax effects of the loss carryback and loss carryforward, assuming that based on the weight of available evidence, it is more likely than not that one-half of the benefits of the loss carryforward will not be realized. (b) Prepare the income tax section of the 2017 income statement beginning with the line 鈥淥perating loss before income taxes.鈥� (c) Prepare the income tax section of the 2018 income statement beginning with the line 鈥淚ncome before income taxes.鈥�

Short Answer

Expert verified

Income before income taxes is the first head under an organization's financial statement of income. It includes the amount a business earns before deducting the amount of tax expense.

Step by step solution

01

(a) Journal entry

Date

Particulars

Debit

Credit

2015

Income tax expense ($120,000脳40%)

$48,000

Income tax payable

$48,000

(To record the income tax)

2016

Income tax expense ($90,000脳40%)

$36,000

Income tax payable

$36,000

(To record the income tax)

2017

Income tax refund receivables

($48,000+$36,000)

$84,000

Benefit due to loss carryback

$84,000

(To record the loss carryback)

2017

Deferred tax asset

[$280,000-$120,000-$90,000脳45%]

$31,500

Benefit due to loss carryforward

$31,500

(To record the loss carryforward)

2017

Benefit due to loss carryforward

($70,000脳45%脳50%)

$15,750

Allowance to reduce the deferred tax asset to expected realizable value

$15,750

(To record the loss carryforward)

2018

Income tax expense

$54,000

Income tax payable

($120,000-$70,000脳45%)

$22,500

Deferred tax asset

$31,500

(To record the tax)

2018

Allowance to reduce deferred tax asset

$15,750

Benefit due to loss carryforward

$15,750

(To record the allowance)

02

(b) Income statement

Income statement for 2017

Particulars

Amount

Operating loss before income taxes

($280,000)

Add: Income tax benefit

Benefit due to loss carryback

$84,000

Benefit duet to loss carryforward

$31,500

Net Loss

($164,500)

03

(c) Preparation of the income tax section

Income statement for 2018

Particulars

Amount

Income before income tax

$120,000

Less: Income tax expense

Current tax

$22,500

Deferred tax

$31,500

Benefit due to loss carryforward

($15,750)

Net Profit

$81,750

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Most popular questions from this chapter

The following facts relate to Duncan Corporation. 1. Deferred tax liability, January 1, 2017, \(60,000. 2. Deferred tax asset, January 1, 2017, \)20,000. 3. Taxable income for 2017, \(105,000. 4. Cumulative temporary difference at December 31, 2017, giving rise to future taxable amounts, \)230,000. 5. Cumulative temporary difference at December 31, 2017, 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 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 tax rate for 2017.

Button Company has the following two temporary differences between its income tax expense and income taxes payable2017 2018 2019 Pretax financial income \(840,000 \)910,000 \(945,000 Excess depreciation expense on tax return (30,000) (40,000) (10,000) Excess warranty expense in financial income 20,000 10,000 8,000 Taxable income \)830,000 \(880,000 \)943,000 The income tax rate for all years is 40%. Instructions (a) Assuming there were no temporary differences prior to 2017, prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017, 2018, and 2019. (b) Indicate how deferred taxes will be reported on the 2019 balance sheet. Button鈥檚 product warranty is for 12 months. (c) Prepare the income tax expense section of the income statement for 2019, beginning with the line 鈥淧retax financial income.鈥�

Using the information from BE19-2, assume this is the only difference between Oxford鈥檚 pretax financial income and taxable income. Prepare the journal entry to record the income tax expense, deferred income taxes, and income taxes payable, and show how the deferred tax liability will be classified on the December 31, 2017, balance sheet.

Jennifer Capriati Corp. has a deferred tax asset account with a balance of \(150,000 at the end of 2016 due to a single cumulative temporary difference of \)375,000. At the end of 2017, this same temporary difference has increased to a cumulative amount of \(450,000. Taxable income for 2017 is \)820,000. The tax rate is 40% for all years. No valuation account related to the deferred tax asset is in existence at the end of 2016. Instructions (a) Record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming that it is more likely than not that the deferred tax asset will be realized. (b) Assuming that it is more likely than not that $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2017 to record the valuation account.

(Deferred Taxes, Income Effects) Stephanie Delaney, CPA, is the newly hired director of corporate taxation for Acme Incorporated, which is a publicly traded corporation. Ms. Delaney鈥檚 first job with Acme was the review of the company鈥檚 accounting practices on deferred income taxes. In doing her review, she noted differences between tax and book depreciation methods that permitted Acme to realize a sizable deferred tax liability on its balance sheet. As a result, Acme paid very little in income taxes at that time.

Delaney also discovered that Acme has an explicit policy of selling off plant assets before they reversed in the deferred tax liability account. This policy, coupled with the rapid expansion of its plant asset base, allowed Acme to 鈥渄efer鈥� all income taxes payable for several years, even though it always has reported positive earnings and an increasing EPS. Delaney checked with the legal department and found the policy to be legal, but she鈥檚 uncomfortable with the ethics of it.

Instructions

Answer the following questions.

  1. Why would Acme have an explicit policy of selling plant assets before the temporary differences reversed in the deferred tax liability account?
  2. What are the ethical implications of Acme鈥檚 鈥渄eferral鈥� of income taxes?
  3. Who could be harmed by Acme鈥檚 ability to 鈥渄efer鈥� income taxes payable for several years, despite positive earnings?
  4. In a situation such as this, what are Ms. Delaney鈥檚 professional responsibilities as a CPA?
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