ADMS 3595 Lecture 18: Sample Questions Chapter 18

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ceruleanpanda909

11 May 2018

School

York University

Department

Administrative Studies

Course

ADMS 3595

Professor

Sandra Iacobelli

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Ex. 18-56 Future income taxes

Nevada Corp., at the end of 2014, its first year of operations, prepared a reconciliation between

pre-tax accounting income and taxable income as follows:

Pre-tax accounting income $300,000

Estimated warranty expenses deductible when paid 800,000

Excess CCA (600,000)

Taxable income $500,000

Estimated warranty expenses of $530,000 will be deductible in 2015, $200,000 in 2016, and

$70,000 in 2017. The use of the depreciable assets will result in taxable amounts of $200,000 in

each of the next three years.

The enacted tax rate is 30% and is not expected to change.

Instructions

a. Prepare a schedule of the future taxable and deductible amounts.

b. Prepare the required adjusting journal entries to record income taxes for 2014.

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Document Summary

Nevada corp. , at the end of 2014, its first year of operations, prepared a reconciliation between pre-tax accounting income and taxable income as follows: Estimated warranty expenses of ,000 will be deductible in 2015, ,000 in 2016, and. The use of the depreciable assets will result in taxable amounts of ,000 in each of the next three years. The enacted tax rate is 30% and is not expected to change. ,000: prepare a schedule of the future taxable and deductible amounts, prepare the required adjusting journal entries to record income taxes for 2014. 18-60 taxable loss carryforward with valuation allowance (aspe) In 2014, its first year of operations, jersey inc. reported a ,000 loss for tax purposes. However, in 2015, jersey reported ,000 taxable income. The tax rate is 20%, and is likely to remain at this rate for the foreseeable future.

Related Questions

Information for Entity A for the year ended December 31, 2018 ($ in millions):

Income from continuing operations before tax	$160
Temporary differences (all related to operating income):
Accrued warranty expense in excess of expense included in operating income	12
Depreciation deducted on tax return in excess of depreciation expense	32
Permanent differences (all related to operating income):
Nondeductible portion of entertainment expense	8
Interest received on municipal bonds	3
Balance in deferred tax asset account, January 1, 2018	1
Balance in deferred tax liability account, January 1, 2018	2
The applicable enacted tax rate for all periods is 40%.

Show work.

A. Prepare the appropriate journal entry to record income taxes.

B. What is Entity A's net income?

C. Sometimes a temporary difference will produce future deductible amounts. Explain what is meant by future deductible amounts. Describe at least one situation that has this effect, for example, one example is when rent revenue is collected in advance from tenants (deferred rent revenue for financial accounting purposes) but will be recognized as the tenants occupy the property. You can think of others. How are future deductible amounts recognized in the financial statements? As between deferred tax assets and deferred tax liabilities, which would management prefer and why?

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The records for Phinn Co. show this data for 2014:

Gross profit on installment sales recorded on the books was$360,000. Gross profit for tax purposes from collections ofinstallment receivables was $270,000.

Machinery was acquired in January for $300,000. Straight-linedepreciation over a ten-year life (no residual value) is used. Fortax purposes, Accelerated depreciation is used and Phinn may deduct20% for 2014.

Interest received on governmental obligations was $9,000.

The estimated warranty liability related to 2014 sales was$19,600. Repair costs under warranties during 2011 were $13,600.The remainder will be incurred in 2015.

Pretax financial income is $600,000. The tax rate is 30%.

Instructions

(a) Prepare a schedule startingwith pretax financial income and compute taxable

income.

(b) Prepare the journal entry torecord income taxes for 2014.

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Sherrod, Inc., reported pretax accounting income of $68 millionfor 2016. The following information relates to differences betweenpretax accounting income and taxable income:

a.	Income from installment sales of properties included in pretaxaccounting income in 2016 exceeded that reported for tax purposesby $6 million. The installment receivable account at year-end had abalance of $8 million (representing portions of 2015 and 2016installment sales), expected to be collected equally in 2017 and2018.
b.	Sherrod was assessed a penalty of $4 million by theEnvironmental Protection Agency for violation of a federal law in2016. The fine is to be paid in equal amounts in 2016 and 2017.
c.	Sherrod rents its operating facilities but owns one assetacquired in 2015 at a cost of $56 million. Depreciation is reportedby the straight-line method assuming a four-year useful life. Onthe tax return, deductions for depreciation will be more thanstraight-line depreciation the first two years but less thanstraight-line depreciation the next two years ($ in millions):

	Income Statement		Tax Return		Difference
2015	$	14	$	18	$	(4	)
2016		14		22		(8	)
2017		14		8		6
2018		14		8		6

	$	56	$	56	$	0

d.	Warranty expense of $5 million is reported in 2016. For taxpurposes, the expense is deducted when costs are incurred, $4million in 2016. At December 31, 2016, the warranty liability was$4 million (after adjusting entries). The balance was $3 million atthe end of 2015.
e.	In 2016, Sherrod accrued an expense and related liability forestimated paid future absences of $14 million relating to thecompanyâs new paid vacation program. Future compensation will bedeductible on the tax return when actually paid during the next twoyears ($8 million in 2017; $6 million in 2018).
f.	During 2015, accounting income included an estimated loss of $2million from having accrued a loss contingency. The loss is paid in2016 at which time it is tax deductible.

Balances in the deferred tax assetand deferred tax liability accounts at January 1, 2016, were $2.0million and $2.4 million, respectively. The enacted tax rate is 40%each year.

1. Determine the amounts necessary to record income taxes for2016 and prepare the appropriate journal entry.

2. What is the 2016 net income?

3. SHow how any deferred tax amounts should be classified andreported in the 2016 balance sheet.

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ADMS 3595 Lecture 18: Sample Questions Chapter 18

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