1.
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 asset
When the Income Tax Expense account i.e. the estimated income tax amount is more than the outstanding amount of income tax i.e. the Income Tax Payable account, the difference is to be debited to Deferred Tax Asset account.
Deferred tax liability
When the Income Tax Expense account i.e. the estimated income tax amount is less than the outstanding amount of income tax i.e. the Income Tax Payable account, the difference is to be credited to Deferred Tax Liability account.
To determine: The portion of tax benefit from tax free interest to be recognized by TD Inc. in its 2018 tax return.
1.
Explanation of Solution
The taxable income of TD Inc. is reduced by $15 million interest, which reduces the tax payable amount for the year 2018.
The amount of tax benefit derived by tax free interest is calculated below.
2.
To determine: The portion of tax benefit from tax free interest should be reported in financial statement.
2.
Explanation of Solution
TD Inc. has not recognized any tax benefit in its financial statement due to “more likely than not” nature of transaction. It means TD Inc. assume that the interest is not taxable even if after the examination by tax authority.
Therefore, TD Inc. should record $6 million tax benefit (Calculated above) as liability for the potential additional tax. It should be reported as long-term liability because the determination probably will not be made within the coming year.
3.
To determine: The amount of tax benefit from the tax treatment of plot sale.
3.
Explanation of Solution
TD Inc. can defer its installment income i.e. $60 million for the tax purpose because installment income has not received in 2018, so it will not qualify for
The portion of the deferral can be treated as a
The following table (1) shows, that TD Inc. could choose $40 million for tax benefit from the plot sale as the cumulative percentage is 60% which is higher than 50%. Hence, TD Inc. could recognize a deferred tax liability of $16 million.
Amount Qualifying for Installment Sales Treatment | Percentage Likelihood of Tax Treatment Being Sustained | Cumulative Likelihood of Tax Treatment Being Sustained |
$60 | 20% | 20% |
50 | 20% | 40% |
40 | 20% | 60% |
30 | 20% | 80% |
20 | 20% | 100% |
Table (1)
The balance amount of $8 million i.e.
4.
To prepare: The
4.
Explanation of Solution
Step 1: Calculation of income tax payable and deferred tax liability
Current Year | Future Taxable Amount | |||
2018 | 2019 | 2020 | Total | |
Pretax accounting income | 90 | |||
Non-temporary Difference: | ||||
Interest Income | (15) | |||
Temporary Difference: | ||||
Plot Sales | (60) | 36 | 24 | 60 |
Taxable income (tax return) | 15 | |||
Enacted tax rate | ||||
Income Tax Payable (1) | 6 | |||
Deferred Tax Liability | 24 |
(Amounts in $ Million)
Table (2)
Step 2: Calculate desired balance of deferred tax liability
$ in millions | |
Ending balance of deferred tax liability (2018) | $24 |
Less: Beginning balance | $0 |
Change needed to achieve desired balance (2) | $24 |
Table (3)
Journal entry for recording of income tax expense for the year 2018 is as follows:
Date | Account Title and Explanation | Post Ref. |
Debit ($) (in millions) |
Credit ($) (in millions) |
2018 | Income Tax Expense (3) | 30 | ||
Income Tax Payable (1) | 6 | |||
Deferred Tax Liability (2) | 24 | |||
(To record the income tax in 2018) |
Table (4)
Working Notes:
Compute income tax expense amount.
5.
To prepare: The journal entry to record income taxes in 2018, assuming the recognition of tax benefits in the financial statements indicated in requirements 1-3.
5.
Explanation of Solution
Step 1: Compute deferred tax liability
Step 2: Compute the potential projected tax
Projected additional tax for interest =
Projected additional tax for installment sale =
Total projected tax liability =
(5)
Note: Out of $60 million installment sale only $40 million qualify for deferred tax liability and $20 millions belongs to “more likely than not” category. So, for calculating projected additional tax for installment sale we have to consider $20 million.
Step 3: Prepare journal entry at the end of 2018
Date | Account Title and Explanation | Post Ref. |
Debit ($) (in millions) |
Credit ($) (in millions) |
2018 | Income Tax Expense (6) | 36 | ||
Income Tax Payable (1) | 6 | |||
Deferred Tax Liability (4) | 16 | |||
Projected additional tax liability (5) | 14 | |||
(To record the income tax in 2018) |
Table (5)
Working Notes:
Compute income tax expense amount.
Journal entry for the situations when the uncertainty about the tax position resolved:
Case 1: Interest income (Permanent difference)
In case of completely disallowed (Worst case):
Date | Account Title and Explanation | Post Ref. |
Debit ($) (in millions) |
Credit ($) (in millions) |
2018 | Projected additional tax for installment income (L -) | 6 | ||
Cash (A-) Or Income Tax Payable (E +) |
6 | |||
(To record the tax liability in 2018) |
Table (6)
In case of completely upheld (Best case):
Date | Account Title and Explanation | Post Ref. |
Debit ($) (in millions) |
Credit ($) (in millions) |
2018 | Projected additional tax for installment income (L-) | 6 | ||
Income Tax Expense (E+) (Benefit) | 6 | |||
(To record the tax liability in 2018) |
Table (7)
Case 2: Interest income (Temporary difference)
In case of completely disallowed (Worst case):
Date | Account Title and Explanation | Post Ref. |
Debit ($) (in millions) |
Credit ($) (in millions) |
2018 | Projected additional tax for installment income (L -) | 8 | ||
Deferred tax liability (L-) | 16 | |||
Cash (A-) Or Income Tax Payable (E +) |
24 | |||
(To record the tax liability in 2018) |
Table (8)
In case of completely upheld (Best case):
Date | Account Title and Explanation | Post Ref. |
Debit ($) (in millions) |
Credit ($) (in millions) |
2018 | Projected additional tax for installment income (L-) | 8 | ||
Deferred tax liability (Setting additional deferred tax liability) | 8 | |||
(To record the tax liability in 2018) |
Table (9)
Interpretation:
When the uncertainty situation resolves, then cash (or income tax payable additional tax) becomes zero and closed to tax expense (permanent difference or to deferred tax (temporary difference).
This problem will provide the insights regarding the tax treatment for multiple difference and uncertain tax position along with necessary calculations like deferred tax liability, projected additional tax liability etc.
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Chapter 16 Solutions
SPICELAND GEN CMB LL INTRM ACCTG; CNCT
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- Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT