Sm18 - Intermediate Accounting Vol.2 Solution CH18 PDF

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CHAPTER 18INCOME TAXESASSIGNMENT CLASSIFICATION TABLETopicsBrief Exercises Exercises Problems Income taxes from a business perspective. 1 Difference between accounting income and taxable income, calculate taxable income. 2, 3, 4, 5, 6, 71, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, ...

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CHAPTER 18 INCOME TAXES ASSIGNMENT CLASSIFICATION TABLE Topics

Brief Exercises

Exercises

Problems

1. Income taxes from a business perspective.

1

2. Difference between accounting income and taxable income, calculate taxable income.

2, 3, 4, 5, 6, 7

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 31, 32, 33

1, 2, 3, 5, 6, 7, 8, 9, 10, 11, 13, 14, 15

3. Taxable temporary differences, calculation of deferred/future income tax liabilities.

5, 8, 9

1, 2, 3, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 21, 22, 30, 31

1, 2, 3, 5, 6, 7, 8, 9, 13, 14, 15

4. Deductible temporary differences, calculation of deferred/future income tax assets.

10, 11, 14

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 15, 16, 17, 18, 19, 22, 30, 31

1, 2, 3, 5, 6, 7, 8, 9, 13, 14, 15

5. Deferred/future income tax balances.

5, 6, 7, 8, 9, 11, 12, 13

4, 5, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 22, 23, 30, 31

1, 3, 4, 5, 6, 7, 8, 9, 10, 11, 13, 14, 15, 16

6. Multiple tax rates, tax rate changes.

13, 14

9, 10, 14, 18, 19, 21, 22, 23, 24, 25, 26, 27

2, 3, 4, 14, 16

7. Loss carrybacks.

15, 16, 17, 18, 19

24, 25, 26, 27

12

ASSIGNMENT CLASSIFICATION TABLE (CONTINUED) Topics

Brief Exercises

Exercises

Problems 12, 15

8. Loss carryforwards.

16, 17, 18, 19

24, 25, 26, 27

9. Valuation of deferred/future tax asset.

18, 19

27, 28, 29

10. Presentation and disclosure of income taxes.

20, 21, 22, 23

5, 7, 8, 9, 11, 15, 21, 22, 31, 32, 33, 34

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15

11. Differences between IFRS and ASPE.

23, 24

7, 8, 9, 11, 15, 20, 21, 22, 27, 31, 32, 33, 34

1, 2, 3, 5, 6, 7, 8, 9, 10, 11, 14

7, 8, 9, 22, 27

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16

12 Temporary difference approach in a comprehensive situation

Please note: The simplifying assumption is made that unless told that a company follows ASPE, all companies in the end-of-chapter brief exercises, exercises and problems follow IFRS and use the term “deferred” rather than “future” for the tax-related accounts.

ASSIGNMENT CHARACTERISTICS TABLE

Item

Description

E18-1

Terminology, relationships, calculations, entries. Identifying Timing and Permanent Differences Identifying Timing and Permanent Differences; Deferred Tax Liabilities and Deferred Tax Assets One temporary difference through three years, one rate. Intraperiod tax allocation. Identify temporary or permanent differences and direction of adjustment. Two temporary differences, future taxable amounts, one rate, no beginning deferred taxes. Two temporary differences, future taxable amounts, one rate, beginning deferred taxes. Two temporary differences, future taxable amounts, change in rate. Reversing and permanent, future taxable amounts, no beginning balances. One temporary difference, future taxable amounts, one rate, no beginning deferred taxes, prepare statements One temporary difference, future taxable amounts, one rate, no beginning deferred taxes. One temporary difference, future taxable amounts, one rate, beginning deferred taxes. One temporary difference, future taxable amounts, change in rate. Permanent and reversing differences, calculate taxable income, entry for income taxes. One temporary difference, future deductible amounts, one rate, beginning deferred taxes. One temporary difference, future deductible amounts, one rate, beginning deferred taxes. One temporary difference, future taxable amount becomes future deductible amount, change in rate. One temporary difference, future deductible amounts, change in rate

E18-2 E18-3

E18-4 E18-5 E18-6 E18-7 E18-8 E18-9 E18-10 E18-11 E18-12

E18-13 E18-14 E18-15 E18-16 E18-17 E18-18 E18-19

Level of Difficulty

Time (minutes)

Simple

10-15

Simple Simple

20-25 20-25

Simple

10-15

Moderate Simple

15-20 10-15

Moderate

20-25

Moderate

20-25

Moderate

20-25

Simple

20-25

Simple

20-25

Simple

15-20

Simple

15-20

Simple

15-20

Simple

15-20

Simple

15-20

Simple

15-20

Moderate

20-25

Moderate

20-25

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED) Item

Description

E18-20

Depreciation, temporary difference over five years, determine taxable income, taxes payable method. Deferred tax liability, change in tax rate. Two differences, no beginning deferred taxes, Multiple rates One difference, multiple rates, beginning deferred taxes, change in rates. Loss carryback and carryforward. Carryback and carryforward of tax losses. Loss carryback and carryforward. Loss carryback and carryforward using valuation allowance. Deferred tax asset, different amounts to be realized. Deferred tax asset, different amounts to be realized using valuation allowance. Three differences, classify deferred taxes. Intraperiod tax allocation. Taxes payable method-taxes payable reporting disclosures. Taxes payable method. Taxes payable method.

E18-21 E18-22 E18-23 E18-24 E18-25 E18-26 E18-27 E18-28 E18-29 E18-30 E18-31 E18-32 E18-33 E18-34

Level of Difficulty

Time (minutes)

Moderate

40-45

Complex Simple

15-20 15-20

Simple

20-25

Moderate Simple Complex Moderate

20-25 15-20 30-35 30-35

Moderate

20-25

Moderate

10-15

Simple Moderate Simple

10-15 25-30 10-15

Simple Moderate

10-15 15-20

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED) Item

Description

P18-1

Three temporary differences and two permanent differences, opening balance, statement disclosure. Six differences, three years, two tax rates, income and statement of financial position reporting. Four differences, one rate, reconciliation of balances and comparative statement disclosure, reconcile tax rate. One temporary difference, tracked for four years, one permanent difference, change in rate. Second year of depreciation difference, two differences, single rate, earnings per share. Several differences, two years, reversing differences, one rate, discontinued operations and financial statements. Two differences, two years, reversing differences, two assumptions, several rates and financial statements. Three differences, several rates, two years and statement disclosure. Two differences, two rates, future income expected. Two differences, two years, calculate taxable income and pre-tax accounting income. Five differences, one year, income and retained earnings reporting, and effective tax rate. Losses carryback and carryforward expected to be realized and not expected to be realized. Prior period error correction, recovery of prior year taxes, income statement and retained earnings statements disclosure. One timing difference, change in tax rate, calculation of effective tax rate, all entries and balance sheet presentation under ASPE and IFRS

P18-2 P18-3 P18-4

P18-5 P18-6

P18-7 P18-8 P18-9 P18-10 P18-11 P18-12

P18-13 P18-14

Level of Difficulty

Time (minutes)

Moderate

30-35

Complex

45-50

Complex

50-60

Complex

50-60

Moderate

40-45

Complex

50-60

Complex

40-45

Complex

50-60

Moderate

25-30

Complex

40-50

Complex

50-60

Moderate

35-40

Moderate

35-40

Moderate

50-60

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED) Item P18-15

P18-16

Level of Time Description Difficulty (minutes) Loss carryback with timing and permanent Complex 60-75 differences and a tax rate change. The tax benefit for only half of the loss carryforward can be recognized. Journal entries and tax reconciliation note is required. Changing tax rates, fair value accounting Moderate 20-25 of investment properties and revaluation method including their impact on deferred tax balances.

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 18-1 (a)

Higher income tax expense results in lower profits.

(b)

Higher income taxes paid decreases cash flow from operations.

(c)

Considering only the effect of income taxes, Faber should register its company in Eastern Europe, where the company would be subject to a lower corporate income tax rate.

BRIEF EXERCISE 18-2 2017 taxable income Tax rate 12/31/2017 income tax payable

$184,000 X 25% $ 46,000

BRIEF EXERCISE 18-3 Accounting income Permanent difference – insurance expense

$156,000 5,000

Reversing difference: CCA > Depreciation Taxable income Current income taxes at 25%

161,000 (14,000) $147,000 $ 36,750

Stmt of Fin Pos Account

(Taxable) Temporary Difference

PP & E

(change in) ($14,000)*

Tax X Rate

25%

Deferred Tax (Liability) (change in) ($3,500)

*Carrying amount and tax base are not given in the exercise; only the net change in the temporary difference is given. Current Tax Expense.......................................... 36,750 Income Tax Payable.................................... Deferred Tax Expense......................................... Deferred Tax Liability..................................

36,750

3,500 3,500

BRIEF EXERCISE 18-4 (a) X(.25) = $200,000 taxes due for 2017 X = $200,000 ÷ .25 X = $800,000 taxable income for 2017 (b) Taxable income [from part (a)]................................. $800,000 Excess of CCA over depreciation............................ 160,000 Dividend income........................................................ 23,000 Unearned rent............................................................ (60,000) Pretax financial income for 2017...................... $923,000

BRIEF EXERCISE 18-5 The $40,000 reversing difference that occurs in the first fiscal year of Mazur Corp. results in a taxable temporary difference at December 31, 2017. The carrying amount is greater than the UCC (tax base) by $40,000. $40,000 X 30% tax rate = $12,000 deferred tax liability. Stmt of Fin Pos Account

(Taxable) Temporary Difference

PP & E

($40,000)*

Deferred Tax (Liability)

Tax X Rate 30%

($12,000)

*Carrying amount and tax base are not given in the exercise; only the net difference is provided. BRIEF EXERCISE 18-6

Accounting income Non-deductible insurance expense

$156,000 5,000

Effective tax rate ($40,250/$156,000)

@ 25% $39,000 1,250 $ 40,250

Divided by Accounting Income 25.0% 0.8% 25.8% 25.8%

BRIEF EXERCISE 18-7 (a) Basic Calculations of Capital Cost Allowance, Amounts and Balances:

Year

(A)

CCA

(B)

A–B

Base

Rate

CCA

UCC

$4,500 $25,500 7,650 17,850

C-B Reversin Carryin C g g Differen Deprec. Amount ce $6,000 $24,000 $1,500 6,000 18,000 (1,650)

2017 $30,000 2018 25,500

15% 30%

2019 2020

17,850 12,495

30% 30%

5,355 3,749

12,495 8,746

6,000 6,000

12,000 6,000

645 2,251

2021

8,746

30%

2,624

6,122

6,000

$0

3,376

(b)

Date

Deferred

Tax

Deductibl e (Taxable) Carryin Temporar g y

Base Amount 12/31/201 $25,50 $24,000 7 0 12/31/201 17,850 18,000

Tax

Difference Rate $1,500 (150)

0.25 0.25

Deferred Tax

Tax Asset Inc. in (Liability) Deferred

Asset (Liability )

before Adjustme nt

$375 (38)

0 375

Tax Asset (Liability) $375 (413)

8 12/31/201 12,495 9 12/31/202 8,746 0 12/31/202 6,122 1

12,000 6,000 $0

495

0.25

124

(38)

162

2,746

0.25

687

124

563

6,122

0.25

1,531

686

845

BRIEF EXERCISE 18-8 Balance Sheet Account

Tax Base

Equip.

$136,000

Carrying – Amount

(Taxable) Temporary Tax = Difference X Rate

$178,000

$(42,000)

30%

Deferred Tax = (Liability) $(12,600)

BRIEF EXERCISE 18-9 Accounting income $ 275,000 Reversing difference: CCA > Deprec. (40,000) Taxable income 235,000 X 30% Income tax payable $ 70,500 Stmt of Fin Pos Account

(Taxable) Temporary Difference

PP & E

($40,000)*

Tax X Rate 30%

Deferred Tax (Liability) ($12,000)

*Carrying amount and tax base are not given in the exercise, only the net difference is provided. Current Tax Expense.......................................... 70,500 Income Tax Payable....................................

70,500

Deferred Tax Expense......................................... 12,000 Deferred Tax Liability..................................

12,000

BRIEF EXERCISE 18-10 Balance Sheet Account Warranty Liability

Tax Base –

$0

Carrying Amount

=

– (256,000)

=

Deductible Temporary Tax Difference X Rate

$256,000

X

Deferred Tax Asset

25% =

$64,000

BRIEF EXERCISE 18-11 Current tax expense for 2017 Deferred tax benefit for 2017 Deferred tax asset, 12/31/2017 Deferred tax asset, 12/31/2016

$70,000 $62,000 40,000

Total income tax expense for 2017

(22,000) $48,000

Current Tax Expense............................................... Income Tax Payable.........................................

70,000

Deferred Tax Asset.................................................. Deferred Tax Benefit........................................

22,000 22,000

70,000

BRIEF EXERCISE 18-12 Current tax expense for 2017 Deferred tax expense for 2017 Deferred tax liability, 12/31/2017 Deferred tax liability, 12/31/2016 Total income tax expense for 2017

$53,000 $52,000 35,000

17,000 $70,000

BRIEF EXERCISE 18-13 Year

Future taxable amount

Rate

Deferred tax liability

2018

$53,000

25%

$ 13,250

2019

310,000

25%

77,500

2020

352,000

30%

105,600 $196,350

The increase in the tax rate from 25% to 30% in 2020 would increase the deferred tax expense and liability in 2017 by $17,600 ($352,000 x 5%).

BRIEF EXERCISE 18-14 Deferred Tax Asset.......................................... Deferred Tax Benefit................................ ($3,200,000 X 5%)

160,000 160,000

BRIEF EXERCISE 18-15 Income Tax Receivable..................................... 168,900 Current Tax Benefit .................................. [$120,900 + ($160,000 X 30%) = $168,900]

168,900

BRIEF EXERCISE 18-16 Income Tax Receivable..........................................138,000 Current Tax Benefit ........................................ 138,000 ($460,000 X 30%) Deferred Tax Asset................................................. 36,000 Deferred Tax Benefit ...................................... [($580,000 – $460,000) X 30%]

36,000

BRIEF EXERCISE 18-17 (a) Income Tax Receivable...................................... 138,000 Current Tax Benefit .................................... ($460,000 X 30%) (b) Income Tax Receivable...................................... 138,000 Current Tax Benefit .................................... ($460,000 X 30%) Deferred Tax Asset............................................ 36,000 Deferred Tax Benefit .................................. Deferred Tax Expense.......................................... 36,000 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value.... ($120,000 X 30%)

138,000

138,000

36,000

36,000

BRIEF EXERCISE 18-18 (a) Current Tax Expense.......................................... Income Tax Payable.................................... Income Tax Payable............................................ Current Tax Benefit..................................... ($25,000 X 30%) (b) Deferred Tax Expense.......................................... Deferred Tax Asset....................................... Allowance to Reduce Deferred Tax Asset to Expected Realizable Value.............. Deferred Tax Benefit .................................. ($25,000 X 30%)

7,500 7,500 7,500 7,500

7,500 7,500 7,500 7,500

BRIEF EXERCISE 18-19 (a) Deferred Tax Expense......................................... 85,000 Deferred Tax Asset......................................

85,000

(b) Deferred Tax Expense......................................... 85,000 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value….

85,000

BRIEF EXERCISE 18-20 Unrealized Gain or Loss - OCI........................... FV-OCI Investments....................................

9,000

Deferred Tax Asset.............................................. Deferred Tax Benefit - OCI.......................... ($9,000 X 30%)

2,700

Net income Other comprehensive income: Unrealized loss, FV-OCI investments Less: Deferred tax benefit Comprehensive income

9,000 2,700

$60,000 $9,000 (2,700)

6,300 $53,700

BRIEF EXERCISE 18-21 (a)Income before income tax Income tax expense Current Deferred Net income

$230,000 $43,000 27,000

(b) Effective tax rate = $70,000/$230,000 = 30.4%

70,000 $160,000

BRIEF EXERCISE 18-22 Income from continuing operations before income tax Income tax expense Income from continuing operations Discontinued operations: Loss from discontinued operations Less: applicable income tax savings Net income

$ 87,000 21,750 65,250 $16,000 4,000

12,000 $ 53,250

BRIEF EXERCISE 18-23 (a) Current ass...