A081 Intermediate Accounting 2
Chapter 9 – Income Taxes
GROUP 4
Leader:
Members:
Parayno, Jhon Lloyd B.
Meneses, Trixie Ann T.
Molina, Dianna Lynn L.
Novencido, Marina Fe B.
Paa, Lheslie Ann P.
Padilla, Angel Ann I.
Problem 4: Multiple Choice-Computational
Lheslie Ann Paa and Angel Anne Padilla
10. Information on Bark Co.’s operations during the year are as follows;
Income Statement
Income tax return
Revenue
1,800,000
900,000
Gain on involuntary conversion
20,000
-
Unrealized gain
12,000
-
Impairment loss on note receivable
100,000
100,000
Bad debts expense
60,000
-
Retirement benefits expense
280,000
420,000
R&D expense
60,000
20,000
Profit for the year, before tax
400,000
Income tax rate
30%
➢ An involuntary conversion occurs when an insured property is destroyed and is replaced with a
similar property or is converted into cash. The gain (excess of the replacement asset’s carrying
amount) is non-taxable.
➢ The unrealized gain pertains to the change in the fair value of held for trading securities have tax
consequences.
➢ There were no temporary differences at the start of the year.
➢ Bark Co. expects to realize the economic benefits of any operating loss carryforward.
How much are the year-end balances of deferred tax liability and deferred tax asset, respectively?
A.
B.
C.
D.
1,052,000; 100,000
1,052,000;30,000
315,600;30,000
315,600;201,600
Answer: D.) 315,600;201,600
Solution:
Revenue (1,800,000 900,000)
Unrealized gain
Bad debts expense
Retirement benefits
expense (280,000 420,000)
R&D expense (60,000 20,000)
Analysis
Taxable Temporary
Difference
Financial income is
greater than taxable
income
Financial income is
greater than taxable
income
Financial income is
less than taxable
income
Financial income is
greater than taxable
income
Financial income is
less than taxable
income
900,000
Total
12,000
60,000
140,000
40,000
1,052,000
Operating loss carry
forward
Total
Multiply by:
Deferred tax liability and
Deferred tax asset,
respectively.
Pretax income
Less: Gain on involuntary conversion
Total: Accounting profit subject to tax
Less: Taxable temporary difference
Subtotal
Add: Deductible temporary difference
Total: Operating loss carry over
Deductible Temporary
Difference
100,000
572,000
1,052,000
672,000
30%
30%
315,600
201,600
400,000
(20,000)
380,000
(1,052,000)
(672,000)
100,000
572,000
Dianna Lynn Molina and Marina Fe Novencido
11. Leer Corp’s pretax income in 20x7 was 100,000. The temporary differences between amounts reported
in the financial statements and tax return are as follows:
➢ Depreciation in the financial statements was 8,000 more than tax depreciation.
➢ The equity method of accounting resulting in financial statement income of 35,000. A 25,000
dividend was received during the year, which is eligible for the 80% dividends received
deduction.
Leer’s effective income tax rate was 30% in 20x7. In its 20x7 income statement, Leer should report a
current provision for income taxes of.
A.
B.
C.
D.
26,400
23,400
21,900
18,600
Answer: B.) 23,400
Solution:
Dividends received
Tax deduction (25,000 x 80%)
Taxable income
25,000
(20,000)
5,000
Income under financial reporting (equity method)
Less: Taxable income
Taxable temporary difference (FI > TI)
35,000
(5,000)
30,000
Description of items
Pretax income
Permanent Differences:
Accounting profit subject to tax
Tax rate
Description of items
100,000
_
100,000
30%
Income tax expense
30,000
Temporary Differences:
Less: ↑ Taxable temporary
difference (FI>TI)
Income (equity method)
Less: ↑ Deferred tax liability (DTL)
(30,000)
30%
Add: ↑ Deductible temporary
difference (FI<TI)
Excess depreciation
Taxable profit
(9,000)
Add: ↑ Deferred tax asset (DTA)
8,000
30%
78,000
30%
2,400
Current tax expense
23,400
Trixie Ann Meneses
12. Bike Co.’s pretax profit in 20x2 is 420,000. Bike’s income tax rate is 30%. The only temporary
differences on December 3, 20x2 relate to the following.
➢ Revenue of 920,000 recognized in 20x1 was collected and taxed in 20x2
➢ Warranty expense of 140,000 recognized in 20x1 was settled and deducted for tax purposes in 20x2.
How much is Bike Co.’s current tax expense in 20x2
A.
B.
C.
D.
360,000
280,000
192,000
108,000
Answer: A.) 360,000
Solution:
Description of items
Pretax income
Permanent Differences:
Accounting profit subject to tax
Tax Rate
Description of items
420,000
_
420,000
30%
Income expense
126,000
Temporary differences:
Add: ↓ Reversal of Taxable
temporary difference (TTD)
Collection of Revenue
Add: ↓ Reversal of Deferred tax
liability (DTL)
920,000
30%
Less: ↓ Reversal of Deductible
temporary difference (DTD)
Settlement of warranty
Taxable profit
276,000
Less: ↓ Reversal of Deferred tax
asset (DTA)
(140,000)
30%
1,200,000
30%
(42,000)
Current tax expense
360,000
Jhonlloyd Parayno
Problem 6: For Classroom Discussion
Limitation on recognition of deferred tax asset
#4
As of December 31, 20x1, Eureka Co. has a deductible temporary different of 300,000and an unused tax
loss of 50,000 which can be used as tax deduction in future periods. Eureka Co. reassesses it’s deferred
tax asset and determines that it is more likely than not that only three-fourths of the related future tax
deduction will be utilized. Eureka Co. Is subject to an income tax rate of 30%. What amount of deferred tax
asset should Eureka Co. recognize on December 31, 20x1
Answer: 78,750
Solution
Deductible temporary difference (DTD)
300,000
Add; Unused tax loss
50,000
Subtotal
350,000
Multiply by; income tax rate
30%
105,000
Multiply by; 3 fourth of related future tax deduction
Deferred tax asset - December 31,20x1
75%
78,750