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- Brooks Company reported a prior period adjustment of 512,000 in pretax financial "income" and taxable income for 2020. The prior period adjustment was the result of an error in calculating bad debt expense for 2019. The current tax rate is 30%, and no change in the tax rate has been enacted for future years. When the company applies intraperiod income tax allocation, the prior period adjustment will be shown on the: a. income statement at 12,000 b. income statement at 8,400 (net of 3,600 income taxes) c. retained earnings statement at 12,000 d. retained earnings statement at 8,400 (net of 3,600 income taxes)Interperiod Tax Allocation Klerk Company had four temporary differences between its pretax financial income and its taxable income during 2019 as follows: At the beginning of 2019, Klerk had a deferred tax liability of 84,300 related to Temporary Difference #2 and a deferred tax asset of 21,090 related to Temporary Difference #4. Based on its tax records, Klerk earned taxable income of 270,000 for 2019. Kerks accountant has prepared the following schedule showing the total future taxable and deductible amounts at the end of 2019 for its four temporary differences: The company has a history of earning income and expects to be profitable in the future. The income tax rate for 2019 is 40%, but in 2018 Congress enacted a 30% tax rate for 2020 and future years. During 2019, for financial accounting purposes, Klerk reported revenues of 750,000 and expenses of 447,100. The deferred taxes related to Temporary Differences #1, #2, and #4 are considered to be noncurrent by the company; the deferred tax related to Temporary Difference #3 is considered to be current. Required: 1. Prepare Klerks income tax journal entry for 2019. 2. Prepare a condensed 2019 income statement for Klerk. 3. Show how the income tax items are reported on Klerks December 31, 2019, balance sheet.Multiple Temporary Differences Vickers Company reports taxable income of 4,500 for 2019. Vickers has two temporary differences between pretax financial income and taxable income at the end of 2019. The first difference is expected to result in taxable amounts totaling 2,470 in future years. The second difference is expected to result in deductible amounts totaling 1,360 in future years. Vickers has a deferred tax asset of 372 and a deferred tax liability of 690 at the beginning of 2019. The current tax rate is 30%, and no change in the tax rate has been enacted for future years. Vickers has positive, verifiable evidence of future taxable income. Required: Prepare Vickerss income tax journal entry at the end of 2019.
- Interpreting Income Tax Disclosures. The financial statements of ABC Corporation, a retail chain, reveal the information for income taxes shown in Exhibit 2.15. REQUIRED a. Assuming that ABC had no significant permanent differences between book income and taxable income, did income before taxes for financial reporting exceed or fall short of taxable income for 2013? Explain. b. Did income before taxes for financial reporting exceed or fall short of taxable income for 2014? Explain. c. Will the adjustment to net income for deferred taxes to compute cash flow from operations in the statement of cash flows result in an addition or a subtraction for 2013? For 2014? d. ABC does not contract with an insurance agency for property and liability insurance; instead, it self-insures. ABC recognizes an expense and a liability each year for financial reporting to reflect its average expected long-term property and liability losses. When it experiences an actual loss, it charges that loss against the liability. The income tax law permits self-insured firms to deduct such losses only in the year sustained. Why are deferred taxes related to self-insurance disclosed as a deferred tax asset instead of a deferred tax liability? Suggest reasons for the direction of the change in amounts for this deferred tax asset between 2012 and 2014. e. ABC treats certain storage and other inventory costs as expenses in the year incurred for financial reporting but must include these in Inventory for tax reporting. Why are deferred taxes related to inventory disclosed as a deferred tax asset? Suggest reasons for the direction of the change in amounts for this deferred tax asset between 2012 and 2014. f. Firms must recognize expenses related to postretirement health care and pension obligations as employees provide services, but claim an income tax deduction only when they make cash payments under the benefit plan. Why are deferred taxes related to health care obligation disclosed as a deferred tax asset? Why are deferred taxes related to pensions disclosed as a deferred tax liability? Suggest reasons for the direction of the change in amounts for these deferred tax items between 2012 and 2014. g. Firms must recognize expenses related to uncollectible accounts when they recognize sales revenues, but claim an income tax deduction when they deem a particular customers accounts uncollectible. Why are deferred taxes related to this item disclosed as a deferred tax asset? Suggest reasons for the direction of the change in amounts for this deferred tax asset between 2012 and 2014. h. ABC uses the straight-line depreciation method for financial reporting and accelerated depredation methods for income tax purposes. Why are deferred taxes related to depreciation disclosed as a deferred tax liability? Suggest reasons for the direction of the change in amounts for this deferred tax liability between 2012 and 2014.Dudley Company failed to recognize the following accruals. It also recorded the prepaid expenses and unearned revenues as expenses and revenues, respectively', in the following year when paid or collected. The reported pretax income was 20,000 in 2018, 25,000 in 2019, and 23,000 in 2020. Required: 1. Compute the correct pretax income for 2018, 2019, and 2020. 2. Prepare the journal entries necessary in 2020 if the errors are discovered at the end of that year. Ignore income taxes. 3. Prepare the journal entries necessary in 2021 if the errors are discovered at the end of that year. Ignore income taxes.Interpreting Income Tax Disclosures. The financial statements of Nike, Inc., reveal the information regarding income taxes shown in Exhibit 2.17. REQUIRED a. Assuming that Nike had no significant permanent differences between book income and taxable income, did income before taxes for financial reporting exceed or fall short of taxable income for 2007? Explain. b. Did book income before taxes for financial reporting exceed or fall short of taxable income for 2008? Explain. c. Will the adjustment to net income for deferred taxes to compute cash flow from operations in the statement of cash flows result in an addition or a subtraction for 2008? d. Nike recognizes provisions for sales returns and doubtful accounts each year in computing income for financial reporting. Nike cannot claim an income tax deduction for these returns and doubtful accounts until customers return goods or accounts receivable become uncollectible. Why do the deferred taxes for returns and doubtful accounts appear as deferred tax assets instead of deferred tax liabilities? Suggest possible reasons why the deferred tax asset for sales returns and doubtful accounts increased between 2007 and 2008. e. Nike recognizes an expense related to deferred compensation as employees render services but cannot claim an income tax deduction until it pays cash to a retirement fund. Why do the deferred taxes for deferred compensation appear as a deferred tax asset? Suggest possible reasons why the deferred tax asset increased between 2007 and 2008. f. Nike states that it recognizes a valuation allowance on deferred tax assets related to foreign loss carryforwards because the benefits of some of these losses will expire before the firm realizes the benefits. Why might the valuation allowance have decreased slightly between 2007 and 2008? g. Nike reports a large deferred tax liability for Intangibles. In another footnote, Nike states, During the fourth quarter ended May 31, 2008 the Company completed the acquisition of Umbro Plc (Umbro). As a result, 378.4 million was allocated to unamortized trademarks, 319.2 million was allocated to goodwill and 41.1 million was allocated to other amortized intangible assets consisting of Umbros sourcing network, established customer relationships and the United Soccer League Franchise. Why would Nike report a deferred tax liability associated with this increase in intangible assets on the balance sheet? h. Nike recognizes its share of the earnings of foreign subsidiaries each year for financial reporting but recognizes income from these investments for income tax reporting only when it receives a dividend. Why do the deferred taxes related to these investments appear as a deferred tax liability? i. Why does Nike recognize both deferred tax assets and deferred tax liabilities related to investments in foreign operations?