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ACC 442 Lecture Notes - Lecture 7: Deferred Tax, Installment Sale, Income Tax

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indigolion532
18 May 2018
School
EMU
Department
Accounting
Course
ACC 442
Professor
Jens

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DTL
Future taxable amount increase
DTA
Future refundable amount increase
Valuation allowance
more than likely not that it will not realize some portion of DTA
Deferred Tax Benefit
DTA increase/DTL decrease
journal entry for valuation allowance
Dr: Income tax expense
CR: Allowance to reduce DTA to expected realizable value
journal entry for change in enacted tax rate
Dr: DTL
Cr: Income Tax expense
*change in temp difference after change
revenue/gain taxable AFTER they are recognized in financial income
DTL
expenses/losses AFTER they are recognized in financial income
DTA
revenue/gain taxable BEFORE they are recognized in financial income
DTA
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expenses/losses BEFORE they are recognized in financial income
DTL
Litigation accruals
DTA (expenses/losses AFTER they are recognized in financial income)
Fines & expenses resulting from a violation of law
Items recognized for accounting purposes but not for tax purposes
Items recognized for accounting purposes but not for tax purposes
Permanent difference (option A)
Items recognized for tax purposes but not for accounting purposes
Permanent difference (option B)
Percentage depletion
Items recognized for tax purposes but not for accounting purposes
proceeds from life insurance carried by the company on a key officer
Items recognized for accounting purposes but not for tax purposes
advance rental receipts
DTA (revenue/gain taxable BEFORE they are recognized in financial income)
depreciable property
DTL (expenses/losses BEFORE they are recognized in financial income) SUBTRACT
installment sale
DTL (revenue/gain taxable AFTER they are recognized in financial income) SUBTRACT
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royalties received in advance
DTA (revenue/gain taxable BEFORE they are recognized in financial income)
product warranty liability
DTA (expenses/losses AFTER they are recognized in financial income)
deduction for dividends received form US corporations
Permanent difference (recognized for tax but not accounting)
interest received on state & municipal bonds
permanent difference (recognized for accounting but not tax)
Depreciation expense under accelerated depreciation method will be _____ in the early years and _____
in later years.
larger, smaller
How to compute DTL/DTA
Book basis
-Tax basis
X Tax rate
=DTL/DTA
Income tax payable + DTL
income tax expense
How to compute income tax expense
Book basis
-Tax basis
X Tax rate
=DTL/DTA
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Document Summary

Valuation allowance more than likely not that it will not realize some portion of dta. Dta increase/dtl decrease journal entry for valuation allowance. Cr: allowance to reduce dta to expected realizable value journal entry for change in enacted tax rate. *change in temp difference after change revenue/gain taxable after they are recognized in financial income. Dtl expenses/losses after they are recognized in financial income. Dta revenue/gain taxable before they are recognized in financial income. Dta expenses/losses before they are recognized in financial income. Dta (expenses/losses after they are recognized in financial income) Fines & expenses resulting from a violation of law. Items recognized for accounting purposes but not for tax purposes. Items recognized for tax purposes but not for accounting purposes. Items recognized for tax purposes but not for accounting purposes proceeds from life insurance carried by the company on a key officer. Items recognized for accounting purposes but not for tax purposes advance rental receipts.

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Related Questions

The tax rate is 30%

Cougar has pretax accounting income (PAI) of $66,000 in 2016after including the effects of the appropriate items from thefollowing information:

MACRS (tax) depreciation $20,000

Officer’s life insurance premium expense $15,000

Interest revenue on municipal bonds $25,000

Depreciation taken for financial reporting purposes $38,000

Actual product warranty costs deducted for tax purposes$20,000

Excess of accrual-basis financial accounting sales overcash-basis

sales recognized for tax purposes $11,000

Estimated product warranty expense for financial reporting

Purposes $27,000

At the beginning of 2016, Cougar had a deferred tax liability(DTL) balance of $17,250 which reflected a $41,800 taxabletemporary difference related to depreciation and another $15,700taxable temporary difference related to accrual-basis salesdifferences. Cougar had a deferred tax asset (DTA) balance of$14,850 related to a $49,500 deductible temporary differenceresulting from a warranty liability (obligation under warranty)balance at the beginning of the year. The tax rate for 2016 is 30%,but during 2016, Congress changed the enacted tax rate to 34% forall future tax years beginning in 2017.

Required:

1) Compute Cougar’s taxable income for 2016. What are incometaxes payable for 2016?

2) Prepare Cougar’s journal entry to record income tax expensefor 2016 (assume no

valuation allowance existed as of the beginning of the year andis unnecessary at the end

of the year).

3) What is Cougar’s effective tax rate?

Cougar has pretax accounting income (PAI) of $66,000 in 2016after including the effects of the appropriate items from thefollowing information:

MACRS (tax) depreciation $20,000

Officer’s life insurance premium expense $15,000

Interest revenue on municipal bonds $25,000

Depreciation taken for financial reporting purposes $38,000

Actual product warranty costs deducted for tax purposes$20,000

Excess of accrual-basis financial accounting sales overcash-basis

sales recognized for tax purposes $11,000

Estimated product warranty expense for financial reporting

Purposes $27,000

At the beginning of 2016, Cougar had a deferred tax liability(DTL) balance of $17,250 which reflected a $41,800 taxabletemporary difference related to depreciation and another $15,700taxable temporary difference related to accrual-basis salesdifferences. Cougar had a deferred tax asset (DTA) balance of$14,850 related to a $49,500 deductible temporary differenceresulting from a warranty liability (obligation under warranty)balance at the beginning of the year. The tax rate for 2016 is 30%,but during 2016, Congress changed the enacted tax rate to 34% forall future tax years beginning in 2017.

Required:

1) Compute Cougar’s taxable income for 2016. What are incometaxes payable for 2016?

2) Prepare Cougar’s journal entry to record income tax expensefor 2016 (assume no

valuation allowance existed as of the beginning of the year andis unnecessary at the end

of the year).

3) What is Cougar’s effective tax rate?

Question 5(6 pts.)

5.1 (3 pts.) On December 31, 2013, Winston Inc.has determined that it is more likely than not that $240,000 of a$600,000 deferred tax asset will not be realized. The journal entryto record this reduction in asset value will include a

A. debit to Income Tax Expense for $360,000.

B. credit to Allowance to Reduce Deferred Tax Asset to ExpectedRealizable Value of $240,000.

C. debit to Income Tax Payable of $240,000.

D. credit to Income Tax Expense for $360,000.

5.2 (3 pts.) Based on the information aboveindicate the balance sheet presentation of therelevant accounts (not the owners’ equity section):

Q6 (8 pts.)

Hawkins Inc. had pre-tax accounting income of $1,800,000 and atax rate of 35% in 2013, its first year of operations. During 2013the company had the following transactions:

Received rent from Barrett Co. for2014 $64,000

Municipal bondincome $80,000

Depreciation for tax purposes in excess of book depreciation$40,000

Installment sales revenue to be collected in2014 $108,000

Prepare the journal entry for taxes:

Q7 (3 pts.) Pringle Corporation reported$200,000 in revenues in its 2012 financial statements, of which$88,000 will not be included in the tax return until 2013. Theenacted tax rate is 40% for 2012 and 35% for 2013. What amountshould Pringle report for deferred income tax (asset or liability)in its balance sheet at December 31, 2012?

Amount

Or

Amount

DTA

DTL