INTERMEDIATE ACCOUNTING
INTERMEDIATE ACCOUNTING
8th Edition
ISBN: 9780078025839
Author: J. David Spiceland
Publisher: McGraw-Hill Education
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Chapter 16, Problem 16.10P

1.

To determine

Net Operating Loss Carryforward

The net operating loss is considered as negative taxable income. When the tax-deductible expenses exceed the taxable revenues, the net operating loss is carry forwarded as it helps in getting deductions in future taxable amount.

Net Operating Loss Carryback

The net operating loss is considered as negative taxable income. It can be used in other fiscal year to offset the taxable income. The net operating loss carry back helps the companies to get reduction in the taxes from the past profitable years, in the form of tax refund, for the tax paid on the profit earned on those years.

Temporary Difference

Temporary difference refers to the difference of one income recognized by the tax rules and accounting rules of a company in different periods. Consequently, the difference between the amount of assets and liabilities reported in the financial reports and the amount of assets and liabilities as per the company’s tax records, is known as temporary difference.

Multiple Temporary Difference

It is very unlikely to have a single temporary difference in any company. In that case, the same concept of temporary difference will be applicable for multiple temporary difference. In case of multiple temporary difference, we have to categorize all temporary difference into future taxable amount and future deductible amounts. The total amount of future taxable amounts multiplied by future tax rate will generate deferred tax liability and total amount of future deductible amount multiplied by future tax rate will generate deferred tax asset.

To prepare: The journal entry to recognize the income tax benefit of the net operating loss in 2016 through carryback option.

1.

Expert Solution
Check Mark

Explanation of Solution

Determine the amount of income tax payable and deferred tax liability:

Particulars Prior years

Current Year 2016

(in millions)

Future Deductible

Amounts (Total)

(in millions)

  2014 2015 2016  
Accounting loss     (135)  
Permanent differences:          
   Fines paid     5  
Temporary differences:        
   Loss contingency     10 (10)
Taxable loss     (120)  
    Loss carryback (75) (30) 105  
    Loss carryforward     15 (15)
      0 (25)
Enacted tax rate 40% 40% 40% 40%
Tax payable (refundable) (30) (12) 0  
Deferred tax asset       (10)

Table (1)

Determine desired balance of deferred tax asset:

Particulars Amount ($)
Ending balance $10
Less: Beginning balance 0
Change in balance $(10) (1)

Table (2)

The journal entry at the end of 2016 to record the income taxes in the books is as follows:

Date Account Titles and Explanation Post Ref.

Debit ($)

(in millions)

Credit ($)

(in millions)

2016
  Receivables- income tax refund (2)   42  
    Deferred Tax Asset (1)   10  
               Income tax benefit – operating loss (3)     52
(To record income taxes)

Table (3)

Working notes:

Determine the total receivables- income tax refund.

Receivable - Income tax refund=Taxpayable(2016)+Taxpayable(2017)=$30+$12=$42 (2)

Determine the total income tax benefit.

Income tax benefit=Receivables - Income tax refund+Deferred tax asset = $42+$10=$52 (3)

  • Income Tax Refund (receivable) is an asset account and it increased by $42 million. So debit it.
  • Deferred tax asset is an asset and is increased by 10 million. Therefore, debit deferred tax asset account with $10 million.
  • Income tax benefit – operating loss (to balance) is equity and increased by $52 million. Therefore, credit stockholders’ equity with $52 million

2.

To determine

To show: The lower portion of the 2016 income statement that reports the income tax benefit of the net operating loss.

2.

Expert Solution
Check Mark

Explanation of Solution

The lower portion of the 2016 income statement that reports the income tax benefit of the net operating loss is as follows:

Particulars Amount ($) Amount ($)
Operating loss before income taxes   (135)
Less: Income tax benefit    
   Tax refund from loss carryback 42  
    Future tax benefits 10 52
Net loss   (83)

Table (4)

3.

To determine

To prepare: The journal entry to record the income taxes in 2017 assuming pre-tax accounting income is $60 million.

3.

Expert Solution
Check Mark

Explanation of Solution

Determine the amount of income tax payable and deferred tax liability:

Particulars

Current Year 2017

(in millions)

Future Deductible

Amounts (Total)

(in millions)

Pretax accounting income 60  
Temporary differences:    
   Loss contingency (10)  
   Operating loss carry forward (15)  
Taxable income 35  
Enacted tax rate 40% 40%
Tax payable (refundable) 14 (5)  
Deferred tax asset   0

Table (5)

Determine desired balance of deferred tax asset:

Particulars Amount ($)
Ending balance $0
Less: Beginning balance (10)
Change in balance $(10) (4)

Table (6)

The journal entry at the end of 2017 to record the income taxes in the books is as follows:

Date Account Titles and Explanation Post Ref.

Debit ($)

(in millions)

Credit ($)

(in millions)

2017
  Income Tax Expense (6)   24  
               Deferred Tax Asset (4)     10
               Income Tax Payable (5)     14
(To record income taxes)

Table (7)

Working Notes:

Calculate the value of income tax expenses

Income tax expense=(Income tax payable +Deferred tax asset)($14 million + 10 million)=$24million (6)

  • Income Tax Expense is an expense account and it decreases the value of shareholders’ equity account. So, debit Income Tax Expense account with $24 million.
  • Deferred tax asset is an asset and decreased by $10 million. Therefore, credit deferred tax asset account with $10 million.
  • Income Tax Payable is a liability account has increased because the taxable income has increased. So, credit Income Tax Payable account with $14 million.

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Chapter 16 Solutions

INTERMEDIATE ACCOUNTING

Ch. 16 - Additional disclosures are required pertaining to...Ch. 16 - Additional disclosures are required pertaining to...Ch. 16 - Prob. 16.13QCh. 16 - Prob. 16.14QCh. 16 - IFRS and U.S. GAAP follow similar approaches to...Ch. 16 - Temporary difference LO161 A company reports...Ch. 16 - Prob. 16.2BECh. 16 - Temporary difference LO162 A company reports...Ch. 16 - Prob. 16.4BECh. 16 - Prob. 16.5BECh. 16 - Valuation allowance LO162, LO163 At the end of...Ch. 16 - VeriFone Systems is a provider of electronic card...Ch. 16 - Temporary and permanent differences; determine...Ch. 16 - Calculate taxable income LO161, LO164 Shannon...Ch. 16 - Prob. 16.10BECh. 16 - Change in tax rate LO165 Superior Developers...Ch. 16 - Net operating loss carryforward LO167 During its...Ch. 16 - Net operating loss carryback LO167 AirParts...Ch. 16 - Tax uncertainty LO169 First Bank has some...Ch. 16 - Intraperiod tax allocation LO1610 Southeast...Ch. 16 - Temporary difference; taxable income given LO161...Ch. 16 - Prob. 16.2ECh. 16 - Prob. 16.3ECh. 16 - Prob. 16.4ECh. 16 - Prob. 16.5ECh. 16 - Prob. 16.6ECh. 16 - Identify future taxable amounts and future...Ch. 16 - Calculate income tax amounts under various...Ch. 16 - Determine taxable income LO161, LO162 Eight...Ch. 16 - Prob. 16.10ECh. 16 - Prob. 16.11ECh. 16 - Prob. 16.12ECh. 16 - Prob. 16.13ECh. 16 - Prob. 16.14ECh. 16 - Prob. 16.15ECh. 16 - Prob. 16.16ECh. 16 - Prob. 16.17ECh. 16 - Prob. 16.18ECh. 16 - Prob. 16.19ECh. 16 - Prob. 16.20ECh. 16 - Prob. 16.21ECh. 16 - Prob. 16.22ECh. 16 - Identifying income tax deferrals LO161, LO162,...Ch. 16 - Multiple temporary differences; balance sheet...Ch. 16 - E16–25 Multiple tax rates; balance sheet...Ch. 16 - Prob. 16.26ECh. 16 - Concepts; terminology LO161 through LO168 Listed...Ch. 16 - Tax credit; uncertainty regarding sustainability ...Ch. 16 - Prob. 16.29ECh. 16 - FASB codification research LO165, LO168, LO1610...Ch. 16 - Prob. 1CPACh. 16 - Prob. 2CPACh. 16 - Prob. 3CPACh. 16 - 4. Stone Co. began operations in 2016 and reported...Ch. 16 - Prob. 5CPACh. 16 - Prob. 6CPACh. 16 - Prob. 7CPACh. 16 - Prob. 1CMACh. 16 - Prob. 2CMACh. 16 - Prob. 3CMACh. 16 - Prob. 16.1PCh. 16 - Prob. 16.2PCh. 16 - Prob. 16.3PCh. 16 - Prob. 16.4PCh. 16 - Prob. 16.5PCh. 16 - Prob. 16.6PCh. 16 - Prob. 16.7PCh. 16 - Prob. 16.8PCh. 16 - P 16–9 Determine deferred tax assets and...Ch. 16 - Prob. 16.10PCh. 16 - Delta Air Lines revealed in its 10-K filing that...Ch. 16 - Prob. 16.12PCh. 16 - Prob. 16.13PCh. 16 - Prob. 16.1BYPCh. 16 - Prob. 16.2BYPCh. 16 - Prob. 16.3BYPCh. 16 - Prob. 16.4BYPCh. 16 - Prob. 16.5BYPCh. 16 - Prob. 16.6BYPCh. 16 - Research Case 166 Researching the way tax...Ch. 16 - Access the financial statements and related...Ch. 16 - Prob. 16.9BYPCh. 16 - Prob. 16.10BYPCh. 16 - Prob. 16.13BYPCh. 16 - Prob. 1AFKC
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