Question 1 (Temporary Differences)
Cinderella has two temporary differences between its pretax financial income and taxable income. The information is shown below:
2012 2013 2014
Pretax financial income
$840,000 $910,000 $945,000
Excess depreciation expense on tax return
($30,000) ($40,000) ($20,000)
Excess warranty expense in financial income
$20,000 $10,000 $8,000
Taxable income
$830,000 $880,000 $933,000
The income tax rate for all years is 40%.
Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for each 2012, 2013, and 2014.
Question 2 (Terminology, Relationships)
Complete the following statements by filling in the blanks.
(a) In a period in which a taxable temporary difference reverses, the reversal will cause taxable income to be _________ (less than, greater than) pretax financial income.
(b) If a $68,000 balance in Deferred Tax Asset was computed by using of a 40% rate, the underlying cumulative temporary difference amounts to $ _______.
(c) Deferred taxes __________ (are, are not) recorded to account for permanent differences.
(d) If a taxable temporary difference originates in 2013, it will cause taxable income for 2013 to be ________ (less than, greater than) pretax financial income for 2013.
(e) If total tax expense is $50,000 and deferred tax expense is $65,000, then the current portion of the expense computation is referred to as current tax _______ (expense, benefit) of $__________.
(f) A valuation account is needed whenever it is judged to be ________ than a portion of a deferred tax asset _______ (will be, will not be) realized.
(g) An increase to the Deferred Tax Liability account on the balance sheet is recorded by a _______ (debit, credit) to the Income Tax Expense account.
Question 3 (Balance Sheet Presentation)
Little Red Riding Hood has temporary differences at December 31, 2015 that result in the following deferred taxes.
Deferred tax liability – current $38,000
Deferred tax asset – current ($62,000)
Deferred tax liability – noncurrent $96,000
Deferred tax asset – noncurrent ($27,000)
Indicate how these balances should be presented in Little Red Riding Hood’s December 31, 2015 balance sheet.
Question 4 (Net Operating Loss)
The Little Mermaid had the following tax information.
Year Taxable Income Tax Rate Taxes Paid
2010 $300,000 35% $105,000
2011 $325,000 30% $97,500
2012 $400,000 30% $120,000
In 2013, the Little Mermaid suffered a net operating loss of $480,000, which it elected to carry back. The 2013 enacted tax rate is 29%. Prepare the Little Mermaid’s entry to record the effect of the loss carryback.
Question 5 (Temporary Differences)
The following information is available for Beauty and the Beast for 2014.
1. Excess of tax depreciation over book depreciation, $40,000. This $40,000 difference will reverse equally over the years 2015-2018.
2. Deferral, for book purposes, of $25,000 of rent received in advance. The rent will be earned in 2015.
3. Pretax financial income = $350,000 and a tax rate for all years of 40%.
(a) Compute taxable income for 2014.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014.
(c) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013, assuming taxable income of $325,000.
Question 6 (Temporary Difference)
Bambi began 2013 with a $90,000 balance in the Deferred Tax Liability account. At the end of 2013, the related cumulative temporary difference amounts to $350,000, and it will reverse evenly over the next 2 years. Pretax accounting income for 2013 is $525,000, the tax rate for all years is 40%, and taxable income for 2013 is $400,000.
(a) Compute income taxes payable for 2013.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013.
(c) Prepare the income tax expense section of the income statement for 2013, beginning with the line “Income before income taxes.”
Question 7 (DTA, Valuation Allowance)
The Seven Dwarfs had a deferred tax asset account with a balance of $150,000 at the end of 2012 due to a single cumulative temporary difference of $375,000. At the end of 2013, this same temporary difference has increased to a cumulative amount of $500,000. Taxable income for 2013 is $850,000. The tax rate is 40% for all years. No valuation allowance related to the deferred tax assets existed at the end of 2012.
(a)
Record income tax expense, deferred income taxes, and income taxes payable for 2013, assuming that it is more likely than not that the deferred tax asset will be realized.
(b)
Assuming that it is more likely than not that $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2013 to record the valuation allowance.