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CAE05- Chapter 10 Income TAX Problem Discussion
Intermediate Accounting 2 (ACC 2204)
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CHAPTER 10 INCOME TAX PROBLEM DISCUSSION
Learning Objectives:
Perform the basic operations of Income Tax. Learn to calculate problems related to Income Tax Applying the methods of accounting for Income Tax.
INCOME TAXES PART 1
All of the following can result in a temporary difference between pretax financial income and taxable income except for a. payment of premiums for life insurance. b. depreciation expense. c. provision for pending lawsuits. d. product warranty costs. (Adapted)
Which of the following items results in a temporary difference deductible amount for a given year? a. Premiums on officer's life insurance (company is beneficiary) b. Recognition of unrealized gains on financial liabilities that are measured at fair value through profit or loss. c. Vacation pay accrual d. Accelerated depreciation for tax purposes; straight-line for financial reporting purposes (Adapted)
Which of the following temporary differences may result to a deferred tax liability? a. Accrued warranty costs b. Subscription revenue received in advance c. Unrealized losses on held for trading securities d. Depreciation (Adapted)
When enacted tax rates change, the asset and liability method of interperiod tax allocation recognizes the rate change as a. A cumulative effect adjustment. b. An adjustment to be netted against the current income tax expense. c. A separate charge to the current year's net income. d. A separate charge or benefit to income tax expense. (Adapted)
Current financial reporting standards currently are moving toward the a. No-deferral approach. b. Partial recognition approach. c. Comprehensive recognition approach. d. Discounted comprehensive recognition approach. (Adapted)
If all temporary differences entering into the determination of pretax accounting income are considered in the computation of deferred taxes and income tax expense, then a. The no-deferral approach is being applied. b. The comprehensive recognition approach is being applied. c. The partial recognition approach is being applied. d. The net-of-tax method is being applied.
income statement. d. Tax expense shown on the income statement is equal to income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year. (Adapted)
- Assuming no prior period adjustments, would the following allocations affect net income? Interperiod Tax Allocation Intraperiod Income Tax Allocation
a. Yes Yes b. Yes No c. No Yes d. No No (Adapted)
INCOME TAXES PART 2
The next two items are based on the following:
Bee Corp. prepared the following reconciliation between book income and taxable income for the year ended December 31, 20x0:
Pretax accounting income 500,
Taxable income 300,
Difference 200,
Interest on municipal bonds 50,
Lower depreciation per financial statements 150,
Total differences 200,
Bee's effective income tax rate for 20x0 is 30%. The depreciation difference will reverse equally over the next three years at enacted tax rates as follows:
Years Tax rates 20x1 30% 20x2 25% 20x3 25%
In Bee's 20x0 income statement, the current portion of its provision for income taxes should be a. 150,000 b. 125,000 c. 90,000 d. 75, Solution: (300,000 taxable income x 30%) = 90,
In Bee's 20x0 financial statements, the deferred portion of its provision for income taxes should be a. 60,000 b. 50,000 c. 45,000 d. 40,
Solution:
Year Reversals* Tax rate Deferred tax
20x1 50,000 30% 15,
20x2 50,000 25% 12, 20x3 50,000 25% 12,
asset would not be realized. In its 20x1 income statement, what amount should Shin report as total income tax expense? a. 8,000 b. 8,500 c. 10,000 d. 13,
Solution:
DTA, Dec. 31, 20x1 before adjustment 20, Allowance (20,000 x 10%) (2,000) DTA, Dec. 31, 20x1 after adjustment 18, DTA, Dec. 31, 20x0 15, Increase in DTA during 20x1 3,
Income tax expense 10,000 (squeeze) Add: Increase in DTA during 20x1 3,
Current tax expense (equal to income tax payable) 13,000 (start)
- Taft Corp. uses the equity method to account for its 25% investment in Flame, Inc. During 20x1, Taft received dividends of ₱30,000 from Flame and recorded ₱180, as its equity in the earnings of Flame. Additional information follows: All the undistributed earnings of Flame will be distributed as dividends in future periods. The dividends received from Flame are eligible for the 80% dividends received deduction. There are no other temporary differences. Enacted income tax rates are 30% for 20x1 and thereafter.
In its December 31, 20x1, balance sheet, what amount should Taft report for deferred income tax liability?
a. 9,000 b. 10,800 c. 45,000 d. 54,
Solution:
Share in associate’s profit 180,
Dividends received (30,000)
Share in undistributed earnings 150,
Multiply by: Percentage subject to taxation (100% - 80%) 20%
Taxable temporary difference 30,
Multiply by: Substantially enacted tax rate for future periods 30%
Deferred tax liability – year-end 9,
- Bishop Corporation began operations in 20x7 and had operating losses of ₱200, in 20x7 and ₱150,000 in 20x8. For the year ended December 31, 20x9, Bishop had pretax book income of ₱300,000. For the three-year period 20x7 to 20x9, assume an income tax rate of 40% and no permanent or temporary differences between book and taxable income. In Bishop’s 20x9 income statement, how much should be reported as total income tax expense? a. 0 b. 40,000 c. 60,000 d. 120, Solution: (300,000 pretax income x 40%) = 120,000. The reversal of deferred tax asset affects only the current tax expense but not income tax expense.
The next two items are based on the following:
(100 x 30% rate in 20x3) + (300 x 25% rate in 20x4)
Deferred tax expense (95)
- Depreciation reverses in 20x4 because it is on this year that the ‘minus’ function becomes an ‘addition’.
- Black Co., organized on January 2, 20x0, had pretax financial statement income of ₱500,000 and taxable income of ₱800,000 for the year ended December 31, 20x0. The only temporary differences are accrued product warranty costs, which Black expects to pay as follows: 20x1 ₱100, 20x2 50, 20x3 50, 20x4 100,
The enacted income tax rates are 25% for 20x0, 30% for 20x1 through 20x3, and 35% for 20x4. Black believes that future years' operations will produce profits. In its December 31, 20x0, balance sheet, what amount should Black report as deferred tax asset?
a. 50,000 b. 75,000 c. 90,000 d. 95,
Solution:
Year of reversal Amounts Tax rate Deferred tax asset
20x1 100,000 30% 30,
20x2 50,000 30% 15,
20x3 50,000 30% 15,
20x4 100,000 35% 35,
95,
- Rom Corp. began business in 20x1 and reported taxable income of ₱50,000 on its 20x1 tax return. Rom's enacted tax rate is 30% for 20x1 and future years. The following is a schedule of Rom's December 31, 20x1, temporary differences in thousands of dollars:
12/31/x Carrying amount over (under) Tax base
Future taxable (deductible) amounts
20x2 20x3 20x4 20x
Equipment 10 (5) 5 5 5
Warranty liability (20) (10) (10)
Deferred compensation
liability (15) (5) (10)
Installment receivables 30 10 20
Totals 5 (5) (10) 25 (5)
What amount should Rom report as total deferred tax asset in its December 31, 20x1, balance sheet?
a. ₱54,000 ₱21, b. ₱54,000 ₱21, c. ₱72,000 ₱3, d. ₱51,000 ₱21,000 ₱3, Solution:
Dec. 27, 20x
Cash (3,000 x 25) Treasury shares (3,000 x 18) Share premium – Treasury shares
75,
54,
21,
On December 1, 20x1, Line Corp. received a donation of 2,000 shares of its ₱5 par value ordinary shares from a shareholder. On that date, the stock’s market value was ₱35 per share. The stock was originally issued for ₱25 per share. By what amount would this donation cause total stockholders’ equity to decrease? a. 70,000 b. 50,000 c. 20,000 d. 0
On July 1, 20x1, Vail Corp. issued rights to stockholders to subscribe to additional share of its common stock. One right was issued for each share owned. A stockholder could purchase one additional share for 10 rights plus ₱15 cash. The rights expired on September 30, 20x1. On July 1, 20x1, the market price of a share with the right attached was ₱40, while the market price of one right alone was ₱2. Vail’s stockholders’ equity on June 30, 20x1, comprised the following: Ordinary shares, ₱25 par value, 4,000 shares issued and outstanding.....₱100, Share premium............................................................................., Retained earnings.........................................................................,
By what amount should Vail’s retained earnings decrease as a result of issuance of the stock rights on July 1, 20x1?
a. 0 b. 5,000 c. 8,000 d. 10,
- On September 20x1, West Corp. made a dividend distribution of one right for each of its 120,000 shares of outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of West's ₱50 variable rate preference share at an exercise price of ₱80 per share. On March 20, 20x3, none of the rights had been exercised, and West redeemed them by paying each stockholder ₱0 per right. As a result of this redemption, West's stockholders' equity was reduced by a. 120 b. 2,400 c. 12,000 d. 36,
Solution: (120,000 rights x ₱0) = 12,000 debit to share premium
- The following trial balance of Shaw Corp. at December 31, 20x1, has been adjusted except for income tax expense. Dr. Cr. Cash 675,
Accounts receivable (net) 2,695,
Inventory 2,185,
Property, plant and equipment (net) 7,366,
Accounts payable and accrued liabilities 1,801,
Income tax payable 654,
Deferred income tax liability 85,
Cash 675,
Accounts receivable (net) [2 - 1M + (125K x 4)] 2,195,
Inventory 2,185,
Total current assets 5,055,
Net sales and other revenues 13,360,
Costs and expenses (11,180,000)
Profit before tax 2,180,
Multiply by: Tax rate 30%
Income tax expense 654,
Income tax payments during the year (475,000)
Adjusted income tax payable 179,
Accounts payable and accrued liabilities 1,801,
Income tax payable 179,
Total current liabilities 1,980,
Working capital = Current assets – Current liabilities
Working capital = (5,055,000 – 1,980,000) = 3,075,
Net sales and other revenues 13,360,
Costs and expenses (11,180,000)
Profit before tax 2,180,
Income tax expense (30% x 2,180,000) (654,000)
Profit after tax 1,526,
Retained earnings, Jan. 1 3,350,
Retained earnings, Dec. 31 4,876,
Ordinary shares 2,300, Share premium 3,680, Retained earnings, Dec. 31, 20x1 4,876, Shareholders' Equity 10,856,
Shareholders’ Equity (Part 2)
- Ray Corp. declared a 5% stock dividend on its 10,000 issued and outstanding shares of ₱2 par value common stock, which had a fair value of ₱5 per share before the stock dividend was declared. This stock dividend was distributed 60 days after the declaration date. By what amount did Ray’s current liabilities increase as a result of the stock dividend declaration? a. 0 b. 500 c. 1,000 d. 2,
Solution: Stock dividend payable is not a liability.
- On July 1, 1999, Bart Corporation has 200,000 shares of ₱10 par ordinary share outstanding and the market price of the stock is ₱12 per share. On the same date, Bart declared a 1-for-2 reverse stock split. The par of the stock was increased from ₱10 to ₱20 and one new ₱20 par share was issued for each two ₱10 par shares outstanding. Immediately before the 1-for-2 reverse stock split, Bart's share premium was ₱450,000. What should be the balance in Bart's share premium account immediately after the reverse stock split is effected? a. 0 b. 450,000 c. 650,000 d. 850,
Solution: Share premium is not affected by share splits.
- The stockholders' equity section of Brown Co.'s December 31, 20x1, balance sheet consisted of the following: Ordinary shares, ₱30 par, 10,000 shares authorized and outstanding ₱300,
Share premium 150,
Retained earnings (deficit) (210,000)
On January 2, 20x2, Brown put into effect a stockholder-approved quasi-reorganization by reducing the par value of the stock to ₱5 and eliminating the deficit against share premium. Immediately after the quasi-reorganization, what amount should Brown report as share premium?
a. (60,000) b. 150,000 c. 190,000 d. 400,
Solution:
The entries to record the quasi-reorganization are as follows:
Jan. 2, 20x
Share capital [(₱30 – ₱5) x 10,000 sh.] Share premium
250,
250,
to record the reduction of par value
Jan. 2, 20x
Share premium Retained earnings to wipe out the deficit
210,
210,
Share premium - Dec. 31, 20x1 150, Credit (see journal entries above) 250, Debit (see journal entries above) (210,000) Share premium after quasi-reorganization 190,
- On January 2, 2000, the board of directors of Gimli Mining Corporation declared a cash dividend of ₱1,200,000 to stockholders of record on January 18, 2000, and payable on February 10, 2000. The dividend is permissible by law in Gimli's state of incorporation. Selected data from Gimli's December 31, 1999, balance sheet follow: Accumulated depletion ₱ 200,
Capital stock 1,100,
Additional paid-in capital 800,
Retained earnings 500,
The ₱1,200,000 dividend includes a liquidating dividend of
a. 800,000. b. 700,000. c. 600,000. d. 200,000.
Solution: (1,200,000 dividends declared – 500,000 retained earnings) = 700,
CAE05- Chapter 10 Income TAX Problem Discussion
Course: Intermediate Accounting 2 (ACC 2204)
University: University of Perpetual Help System DALTA
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