Chapter 18 Solutions

EXERCISE 18-1 (10-15 minutes) Add or deduct from be income (a)2deduct (b)1add (c)3add (d)1add (e)2deduct (f)2deduct (g)1add (h3deduct (i)3deduct (j)1add (k)1add (l)1add EXERCISE 18-3 (15-20 minutes) (a) story income$105,000 Permanent differences Non-deductible fines 11,000 116,000 Timing differences Excess of CCA over amortization (16,000) Excess rent serene over rent earned? 24,000 measureable income$124,000 on-going income measurees 30% $37,200 (b) deductible equipoise( taskable) next evaluateCurrent saddleryTemporary measure revenue AssetLong- AccountDifferencesXRate(Liability)TermPP & E($16,000)*30%($4,800) LT Unearned riptide revenue 24,00030% 7,200C next income evaluate summation, Dec. 31, 20092,400 proximo income value addition before adjustment 0 Incr. in in store(predicate) income tax asset and time to come income tax eudaemonia for 2009$2,400 *Carrying amount and tax basis ar not given in the exercise, only the net difference (c)Current Income impos e Expense37,200 Income value collectible37,200 futurity Income revenue Asset? 7,200* approaching Income Tax utility2,400 in store(predicate) Income Tax Liability? 4,800* *or a net debit to next(a) Income Tax Asset of $2,400 Because of a flat tax regularize, these totals can be reconciled $24,000 $16,000) X 30% = $7,200 + ($4,800). EXERCISE 18-3 (Continued) (d)Income before income taxes$105,000 Income tax outlay Current$37,200 prox benefit? (2,400)? 34,800 can income$70,200 (e) dual-lane by Accounting 30% Income Accounting income $ 105,000 31,500 30. 0% Non-deductible fines 11,000 3,300 3. 1% 34,800 33. 1% Effective tax rate ($34,800/$105,000)33. 1% (f)Current assets proximo income tax asset$7,200 Non-Current liabilities Future Income Tax Liability4,800 EXERCISE 18-9 (15-20 minutes) (a) Balance solelyowable Sheet (Taxable) Future Tax AccountCarryingTaxTemporaryTaxAssetDec. 31, 2008AmountBasisDifferencesRate(Liability) Warranty obligation($130,000)$0 $130,000 25%$3 2,500 Future income tax asset, celestial latitude 31, 200832,500 Future income tax asset before adjustment 0 Increase in next income tax asset and future income tax benefit for 2008$32,500 Future divisions Total200920102011 Deductible temporary difference Warranty liability $130,000 $50,000 $35,000 $45,000 Tax rate enacted for the year 25%25%25% Future tax asset $32,500 $12,500 $8,750 $11,250 EXERCISE 18-9 (Continued) (b)2008 Accounting income$135,000Permanent differences-0- Timing difference Warranty expense warranty costs incurred 130,000 Taxable income 265,000 Current income taxes 25%$66,250 (c) Current Income Tax Expense66,250 Income Tax payable 66,250 Future Income Tax Asset32,500 Future Income Tax Benefit32,500 (d)Income before income taxes$135,000 Income tax expense Current$66,250 Future benefit? (32,500) 33,750 Net income$101,250 EXERCISE 18-15 (40-45 minutes) (a) Basic Calculations of Capital Cost onlyowance, Amounts and Balances C-B (A)(B)A B(C)Timing YearBaseCCAUCC Amort. NBVDifference 2007 $600,000 X 40 % X . $ 120,000 $ 480,000 $120,000$480,000$0 2008 480,000 X 40 % 192,000 288,000 120,000360,000(72,000) 2009 288,000 X 40 % 115,200 172,800 120,000240,0004,800 2010 172,800 X 40 % 69,120 103,680 120,000120,00050,880 2011 103,680 X 40 % 41,472 62,208120,000078,528 $537,792 (b) 20072008200920102011 Accounting income $ 340,000 $340,000 $340,000 $340,000 $ 340,000 Timing difference (72,000) 4,800 50,880 78,528 Taxable income $ 340,000 $268,000 $344,800 $390,880 $ 418,528 X 34 %X 34 %X 34 %X 34 %X 34 %Income taxes payable$115,600$91,120$117,232$132,899$142,300 EXERCISE 18-15 (Continued) (c) and (d) 2007 Balance Deductible Sheet (Taxable) Future Tax AccountCarryingTaxTemporaryTaxAsset Dec. 31, 2007AmountBasisDifferencesRate(Liability) Property Plant & Equipment$480,000 $480,000 034%$0 Future income tax asset/liability, declination 31, 20070 Future income tax asset/liability before adjustment 0 Increase in future income tax liability and future inc ome tax expense for 2007$0 Current Income Tax Expense115,600 Income Taxes cod? 115,600 ($340,000 X 34%) kick downstairs (a) EXERCISE 18-15 (Continued) (c) and (d) continued 008 Balance Deductible Sheet (Taxable) Future Tax AccountCarryingTaxTemporaryTaxAsset Dec. 31, 2008AmountBasisDifferencesRate(Liability) Property Plant & Equipment$360,000$288,000 (72,000)34%($24,480) Future income tax liability, December 31, 2008(24,480) Future income tax liability before adjustment 0 Increase in future income tax liability and future income tax expense for 2008($24,480) Current Income Tax Expense91,120 Income Taxes Payable? 91,120 ($268,000 X 34%) startle (a) Future Income Tax Expense24,480 Future Income Tax Liability? 24,480 EXERCISE 18-15 (Continued) (c) and (d) continued 2009Balance Deductible Sheet (Taxable) Future Tax AccountCarryingTaxTemporaryTaxAsset Dec. 31, 2009AmountBasisDifferencesRate(Liability) Property Plant & Equipment$240,000$172,800 ($67,200)34%($22,848) Future income tax liability, December 31, 2009(22,848) Future income tax liability before adjustment (24,480) Decrease in future income tax liability and future income tax benefit for 2009$1,632 2009 Current Income Tax Expense117,232 Income Taxes Payable? 117,232 ($344,800 X 34%) part (a) Future Income Tax Liability1,632 Future Income Tax Benefit? 1,632 EXERCISE 18-15 (Continued) (c) and (d) continued 2010 Balance DeductibleSheet (Taxable) Future Tax AccountCarryingTaxTemporaryTaxAsset Dec. 31, 2010AmountBasisDifferencesRate(Liability) Property Plant & Equipment$120,000$103,680 ($16,320)34%($5,549) Future income tax liability, December 31, 2010(5,549) Future income tax liability before adjustment (22,848) Decrease in future income tax liability and future income tax benefit for 2010$17,299 2010 Current Income Tax Expense132,899 Income Taxes Payable? 132,899 ($390,880 X 34%) part (a) Future Income Tax Liability17,299 Future Income Tax Benefit? 17,299 EXERCISE 18-15 (Continued) (c) and (d) continued 20 11 Balance DeductibleSheet (Taxable) Future Tax AccountCarryingTaxTemporaryTaxAsset Dec. 31, 2011AmountBasisDifferencesRate(Liability) Property Plant & Equipment$0$62,208 $62,20834%$21,151 Future income tax asset, December 31, 201121,151 Future income tax liability before adjustment (5,549) Increase in future income tax asset and future income tax benefit for 2011$26,700 2011 Current Income Tax Expense142,300 Income Taxes Payable? 142,300 ($418,528 X 34%) part (a) Future Income Tax Liability5,549* Future Income Tax Asset21,151* Future Income Tax Benefit? 26,700 *alternately, a debit to Future Tax Asset26,700 EXERCISE 18-15 (Continued) (e) 2007Current Income Tax Expense115,600 Income Taxes Payable? 115,600 ($340,000 X 34%) 2008 Current Income Tax Expense91,120 Income Taxes Payable? 91,120 ($268,000 X 34%) 2009 Current Income Tax Expense117,232 Income Taxes Payable? 117,232 ($344,800 X 34%) 2010 Current Income Tax Expense132,899 Income Taxes Payable? 132,899 ($390,880 X 34%) 2011 Curr ent Income Tax Expense142,300 Income Taxes Payable? 142,300 ($418,528 X 34%) trouble 18-9 Part 1. (a) Mixed tax rate Future years 20092010201120122013Total Future taxable amounts ($300) ($300) ($300) ($200) ($100) ($1,200) Tax rate enacted for the year 30%30%30%35%35%Future tax (liability) ($90) ($90) ($90) ($70) ($35) ($375) Future years 20092010201120122013Total Future deductible amounts $1,800 $1,800 Tax rate enacted for the year 30%30%30%35%35% Future tax asset $ 630 $ 630 PROBLEM 18-9 (Continued) Part 1. (a) Balance Deductible Sheet (Taxable) Future Tax AccountCarryingTaxTemporaryTaxAsset Dec. 31, 2008Amount*Basis*DifferencesRate(Liability) Property Plant & Equipment($1,200)Mixed($375) Litigation Liability1,800Mixed630 Future income tax asset, December 31, 2008255Future income tax liability before adjustment (500) Increase in future income tax asset and future income tax benefit for 2008$755 * not given in the problem Part 1. part (b) Current Income Tax Expense1,200 Income Tax Payable1,200 ($4,000 X 30%) Future Income Tax Asset/Liability755 Future Income Tax Benefit755* *Alternately Future Income Tax Asset630 Future Income Tax Liability125 Future Income Tax Benefit755 PROBLEM 18-9 (Continued) Part 2. (a) Mixed tax rates Future years 2009201020112012Total Future taxable amounts ($400) ($400) ($400) ($400) ($1,600) Tax rate enacted for the year 30%30%30%35%Future tax (liability) ($120) ($120) ($120) ($140) ($500) Future years 2009201020112012Total Future deductible amounts $3,000 $3,000 Tax rate enacted for the year 30%30%30%35% Future tax asset $900 $900 PROBLEM 18-9 (Continued) Part 2. (a) Balance Deductible Sheet (Taxable) Future Tax AccountCarryingTaxTemporaryTaxAsset Dec. 31, 2008Amount*Basis*DifferencesRate(Liability) Property Plant & Equipment($1,600)Mixed($500) Litigation Liability3,000Mixed900 Future income tax asset, December 31, 2008400 Future income tax asset before adjustment 600Decrease in future income tax asset and future income tax expense for 2008$200 * not given in the problem Part 2. part (b) Current Income Tax Expense1,200 Income Tax Payable1,200 ($4,000 X 30%) Future Income Tax Expense200* Future Income Tax Asset200* *Alternately Future Income Tax Expense200 Future Income Tax Asset300 Future Income Tax Liability500 PROBLEM 18-9 (Continued) (c) Part 1 All balance sheet related accounts are non- contemporary Pirates Corp. Balance Sheet December 31, 2008 Non-current assets Future income tax asset$255 Part 2 All balance sheet related accounts are non-current Eagles Corp. Balance Sheet December 31, 2008Non-current assets Future income tax asset$400 PROBLEM 18-12 (a)2007 Income Tax turn back receivable20047,500 ($25,000 X 30%) Income Tax Refund Receivable200518,000 ?($60,000 X 30%) Income Tax Refund Receivable200632,000 ($80,000 X 40%) Current Income Tax Benefit (Due to Loss Carryback)57,500 NoteAn acceptable alternative is to record only unmatchable Income Tax Refund Receivable account for the amount of $ 57,500. Future Income Tax Asset18,000 Future Income Tax Benefit (Due to Loss Carryforward)18,000 ($210,000 $25,000 $60,000 $80,000 = $45,000) ($45,000 X 40% = $18,000) 2008 Current Income Tax Expense10,000Income Tax Payable? 10,000 ($70,000 $45,000) X 40% Future Income Tax Expense18,000 Future Income Tax Asset18,000 ($18,000 $0) 2009 Current Income Tax Expense31,500 Income Tax Payable ($90,000 X 35%)31,500 PROBLEM 18-12 (Continued) (b)One or more income tax refund receivable accounts totalling $57,500 will be reported under current assets on the balance sheet at December 31, 2007. This type of receivable is usually listed immediately supra inventory in the current asset section. This receivable is normally collectible within two months of filing the amendment to the tax returns reflecting the carryback.A future income tax asset of $18,000 should also be classified as a current asset because the benefits of the damage carryforward are expected to be realized in the year that immediately follows the hurt year, which operator the benefits are expected to be realized in 2008. A current future income tax asset is usually listed at or near the end of the list of current assets on the balance sheet. Also, retain earnings is increased by $75,500 ($57,500 + $18,000) as a result of the entries to record the benefits of the loss carryback and the loss carryforward. (c)2007 Income affirmationOperating loss before income taxes($210,000) Income tax benefit Current benefit due to loss carryback$57,500 Future benefit due to loss carryforward? 18,000 75,500 Net loss($134,500) (d)2008 Income Statement Income before income taxes$70,000 Income tax expense Current$10,000a Future? 18,000? 28,000 Net income$42,000 a ($70,000 $45,000) X 40% PROBLEM 18-12 (Continued) (e)2007 Income Tax Refund Receivable20047,500 ($25,000 X 30%) Income Tax Refund Receivable200518,000 ($60,000 X 30%) Income Tax Refund Receivable200632,000 ?($80,000 X 40%) Current Income Tax Benefit (Due to Loss Carryback)57,500NoteAn acceptable alternative is to record only one Income Tax Refund Receivable account for the amount of $57,500. Although the tax benefit is not recognized in the accounts, Mearat Inc. has a tax loss carryforward of $45,000 which should be disclosed. 2008 Current Income Tax Expense10,000 Income Tax Payable? 10,000 ($70,000 $45,000) X 40% 2009 Current Income Tax Expense31,500 Income Tax Payable ($90,000 X 35%)31,500 (f)2007 entree for current taxes no change 2007 if a valuation perimeter is used, the full benefit and future tax asset related to the tax loss carryforward is recognized and whence offset by the allowance, as follows.Future Income Tax Asset18,000 Future Income Tax Benefit (Due to Loss Carryforward)18,000 ($45,000 X 40% = $18,000) Problem 18-12 (f) (Continued) Future Income Tax Expense18,000 Allowance to stretch Future Income Tax Asset to achievable Value)18,000 ($18,000 $0) 2008 entry for current taxes no change 2008 because the tax l oss carryforward has now been used, both the amount in the future tax account and in its allowance account must be removed, as follows. Future Income Tax Expense (Due to Use of Loss Carryforward)18,000 Future Income Tax Asset18,000 Allowance to Reduce Future IncomeTax Asset to Realizable Value18,000 Future Income Tax Benefit (from Adjustment of Allowance)18,000 Alternatively, one entry could turn out been made Allowance to Reduce Future Income Tax Asset to Realizable Value18,000 Future Income Tax Asset18,000 2009 No change to part (e) entry. (g)2007 Income Statement Operating loss before income taxes($200,000) Income tax benefit Current benefit due to loss carryback? 57,500 Net loss($142,500) 2008 Income Statement Income before income taxes$70,000 Income tax expense Current a 14,000 Net income$56,000 a ($70,000 $35,000) X 40% PROBLEM 18-12 (Continued) h)Using the valuation allowance instead of applying the reduction in value directly does not have any impact on cash flows. The u se of the contra allowance simply permits the recording of the full benefits associated with all future deductible amounts in the asset account. This facilitates tracking for management purposes. It has no use for financial describe purposes except, perhaps, for the transparency of the information. Readers can see the total possible benefits and the extent to which management has judged they will not be realized. Use of the allowance has no impact on cash flows.