EXERCISES Exercise 16-1 Temporary difference; taxable income given LO16-1 Text: E 16-1 Exercise 16-2 Temporary difference; income tax payable given LO16-2 Text: E 16-4 Exercise 16-3 Deferred tax asset; taxable income given; previous balance in valuation allowance LO16-2 LO16-3 Text: E 16-11 Stancil Industries reports pretax accounting income of $80 million, but due to a single temporary difference, taxable income is only $50 million. At the beginning of the year, no temporary differences existed. Required: Assuming a tax rate of 35%, prepare the appropriate journal entry to record Stancil’s income taxes. In 2016, Lambert Services collected rent revenue for 2017 tenant occupancy. For income tax reporting, the rent is taxed when collected. For financial statement reporting, the rent is recognized as income in the period earned. The unearned portion of the rent collected in 2016 amounted to $90,000 at December 31, 2016. Lambert had no temporary differences at the beginning of the year. Required: Assuming an income tax rate of 40%, and that the 2016 income tax payable is $285,000, prepare the journal entry to record income taxes for 2016. At the end of 2015, Mathis Industries had a deferred tax asset account with a balance of $120 million attributable to a temporary book-tax difference of $300 million in a liability for estimated expenses. At the end of 2016, the temporary difference is $280 million. Mathis has no other temporary differences. Taxable income for 2016 is $720 million and the tax rate is 40%. Mathis has a valuation allowance of $40 million for the deferred tax asset at the beginning of 2016. Required: 1. Prepare the journal entry(s) to record Mathis’s income taxes for 2016 assuming it is “more likely than not” that the deferred tax asset will be realized. 2. Prepare the journal entry(s) to record Mathis’s income taxes for 2016 assuming it is “more likely than not” that one-half of the deferred tax asset will not ultimately be realized. Alternate Exercises and Problems Copyright © 2015 McGraw-Hill Education. All rights reserved. 16-1 Exercise 16-4 Multiple differences; calculate taxable income LO16-1 LO16-4 Text: E 16-13 Exercise 16-5 Intraperiod tax allocation LO16-10 Text: E 16-29 Fessler Transport began operations in January 2016, and purchased a delivery truck for $160,000. Fessler plans to use straight-line depreciation over a fouryear expected useful life for financial reporting purposes. For tax purposes, the deduction is 50% of cost in 2016, 30% in 2017 and 20% in 2018. Pretax accounting income for 2016 was $900,000, which includes interest revenue of $160,000 from municipal bonds. The enacted tax rate is 40%. Required: Assuming no differences between accounting income and taxable income other than those described above: 1. Prepare the journal entry to record income taxes in 2016. 2. What is Fessler’s 2016 net income? The following income statement does not reflect intraperiod tax allocation. Income Statement For the fiscal year ended June 30, 2016 ($ in millions) Revenues Cost of goods sold Gross profit Operating expenses Income tax expense Income before discontinued operations and extraordinary item Loss from discontinued operations Net income The company’s tax rate is 40%. $415 (175) $240 (90) (44) $106 (40) $ 66 Required: Recast the income statement to reflect intraperiod tax allocation. 16-2 Copyright © 2015 McGraw-Hill Education. All rights reserved. Intermediate Accounting, 8/e PROBLEMS Problem 16-1 Change in tax rate; single temporary difference LO16-5 Text: P 16-3 Commercial Development began operations in December 2016. When lots for industrial development are sold, Commercial recognizes income for financial reporting purposes in the year of the sale. For some lots, Commercial recognizes income for tax purposes when collected. Income recognized for financial reporting purposes in 2016 for lots sold this way was $48 million which will be collected over the next three years. Scheduled collections for 2017-2019 are as follows: 2017 $ 16 million 2018 20 million 2019 12 million $48 million Pretax accounting income for 2016 was $68 million. The enacted tax rate is 40 percent. Required: 1. Assuming no differences between accounting income and taxable income other than those described above, prepare the journal entry to record income taxes in 2016. 2. Suppose a new tax law, revising the tax rate from 40% to 35%, beginning in 2018, is enacted in 2017, when pretax accounting income was $60 million. Prepare the appropriate journal entry to record income taxes in 2017. 3. If the new tax rate had not been enacted, what would have been the appropriate balance in the deferred tax liability account at the end of 2017? Why? Alternate Exercises and Problems Copyright © 2015 McGraw-Hill Education. All rights reserved. 16-3 Problem 16-2 Net operating loss carryback and carryforward; temporary difference; permanent difference LO16-2 LO16-4 LO16-7 Text: P 16-10 CPS Corporation reported a pretax operating loss of $540,000 for financial reporting purposes in 2016. Contributing to the loss were (a) a penalty of $20,000 assessed by the Environmental Protection Agency for violation of a federal law and paid in 2016 and (b) an estimated loss of $40,000 from accruing a loss contingency. The loss will be tax deductible when paid in 2017. The enacted tax rate is 40%. There were no temporary differences at the beginning of the year and none originating in 2016 other than those described above. Taxable income in CPS’s two previous years of operation was as follows: 2014 300,000 2015 120,000 Required: 1. Prepare the journal entry to recognize the income tax benefit of the net operating loss in 2016. CPS elects the carryback option. 2. Show the lower portion of the 2016 income statement that reports the income tax benefit of the net operating loss. 3. Prepare the journal entry to record income taxes in 2017 assuming pretax accounting income is $240,000. No additional temporary differences originate in 2017. 16-4 Copyright © 2015 McGraw-Hill Education. All rights reserved. Intermediate Accounting, 8/e