EXERCISES
Exercise 16-1
Requirement 1
Since taxable income is less than pretax accounting income, a future taxable
amount will occur when the temporary difference reverses. This means a deferred tax
liability should be recorded to reflect the future tax consequences of the temporary
difference.
Income tax expense (to balance)
Deferred tax liability ([$400,000 - 250,000] x 35%)
Income tax payable ($250,000 x 35%)
140,000
52,500
87,500
As a result, net income is $260,000:
Pretax accounting income
Income tax expense
Net income
$400,000
140,000
$260,000
Requirement 2
In its balance sheet, Alvis will report the $52,500 deferred tax liability among
either its current or long-term liabilities depending on the cause of the temporary
difference and the $87,500 income tax payable as a current liability.
Solutions Manual, Vol.2, Chapter 16
© The McGraw-Hill Companies, Inc., 2009
16-15
Exercise 16-2
Income tax expense (to balance)
Deferred tax asset ($300,000 x 40%)
Income tax payable (given)
830,000
120,000
950,000
Exercise 16-3
Income tax expense (to balance)
Deferred tax asset ([$1 million x 40%] - $435,000)
Income tax payable ($75 million x 40%)
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16-16
30,035,000
35,000
30,000,000
Intermediate Accounting, 5e
Exercise 16-4
Requirement 1
($ in millions)
Current
Future
Year
Deductible
2009
Amounts
Temporary difference:
Taxable income
Enacted tax rate
Tax payable currently
Deferred tax asset
(70)
180
40%
72
40%
(28)
↓
Deferred tax asset:
Ending balance (balance currently needed)
Less: beginning balance ($75 x 40%)
Change needed to achieve desired balance
$ 28
(30)
$( 2)
Journal entry at the end of 2009
Income tax expense (to balance)
Deferred tax asset (determined above)
Income tax payable (determined above)
74
2
72
Requirement 2
($ in millions)
Income tax expense (to balance)
Deferred tax asset (determined above)
Income tax payable (determined above)
74
Income tax expense
Valuation allowance – deferred tax asset (1/2 x $28)
14
2
72
14
Of course, these two entries can be combined.
Solutions Manual, Vol.2, Chapter 16
© The McGraw-Hill Companies, Inc., 2009
16-17
Exercise 16-8
($ in millions)
December 31
2009
Depreciable asset (net):
Accounting basis
Tax basis
TEMPORARY DIFFERENCE
$80 (20)
80 (25)
5
Tax rate
2010
$60 (20)
55 (33)
$ 5 13
40%
DEFERRED TAX LIABILITY
$ 2
↑
↑
originating
differences
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16-22
2011
$40 (20)
22 (15)
$18 (5)
2012
$20 (20) $0
7 (7) 0
$13 (13) $0
40%
40%
$7.2
$ 5.2
↑
40%
$0
↑
reversing
differences
Intermediate Accounting, 5e
Exercise 16-15
A deferred tax liability is established using the currently enacted tax rate for the
year(s) a temporary difference is expected to reverse. In this case that rate was 40%.
The change in the tax law in 2010 constitutes a change in estimate. The deferred tax
liability is simply revised to reflect the new rate.
($ in millions)
Income tax expense (to balance) ................................................
Deferred tax liability ($20 million x [40% – 30%]) ......................
Income tax payable ($30 million x 40%) .................................
10
2
12
When a company revises a previous estimate, prior financial statements are not
revised. No adjustment is made to existing accounts. A disclosure note should
describe the effect of a change in estimate on income before extraordinary items, net
income, and related per-share amounts for the current period.
Exercise 16-16
Income tax expense (to balance) ................................................ 32,000
Deferred tax asset ($12,000 x 40%) ............................................ 4,800
Deferred tax liability ($77,000 x 40%) ...................................
30,800
Income tax payable ($15,000 x 40%)......................................
6,000
Solutions Manual, Vol.2, Chapter 16
© The McGraw-Hill Companies, Inc., 2009
16-31
Exercise 16-17
Requirement 1
($ in millions)
Income tax expense (to balance)................................................
Deferred tax asset ($25 million x 40%) .......................................
Deferred tax liability ($80 million x 40%) ..............................
Income tax payable ($145 million x 40%)...............................
80
10
32
58
Requirement 2
($ in millions)
Pretax income
Income tax expense
Net income
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16-32
$200
(80)
$120
Intermediate Accounting, 5e
Exercise 16-20
Requirement 1
($ in thousands)
Current
Year
2009
Pretax accounting income
Non-temporary difference:
Municipal bond interest
Temporary differences:
Depreciation
Warranty expense
977
Taxable income (income tax return)
900
Enacted tax rate
Tax payable currently
Deferred tax liability
Deferred tax asset
40%
360
Future
Taxable
Amounts
Future
Deductible
Amounts
(32)
(55)
10
85
(10)
40%
40%
34
(4)
↓
↓
Deferred tax
liability
Ending balances (balances currently needed):
Less: beginning balances:
Change needed to achieve desired balances
Journal entry at the end of 2009
Income tax expense (to balance)
Deferred tax asset (determined above)
Deferred tax liability (determined above)
Income tax payable (determined above)
$34
(12)
$22
Deferred tax
asset
$ 4
(0)
$4
378
4
22
360
Requirement 2
($ in thousands)
Pretax income
Income tax expense
Net income
Solutions Manual, Vol.2, Chapter 16
$ 977
(378)
$599
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16-35