Concept explainers
1.
Taxable Income
The amount of adjusted gross income which is liable to be taxed is known as taxable income
Deferred tax is an amount i.e. computed on the basis of tax liability on the income as per income statement and the income as per tax return, that difference is known as deferred tax. Deferred tax amount is deferred to the next financial year.
When the Income Tax Expense account is less than the Income Tax Payable account, this difference is known as Deferred Tax Liability.
To determine: The amount necessary to record A’s income taxes for 2018 and prepare
1.
Explanation of Solution
Determine Income Tax Payable.
The following table shows the taxable income and income tax payable for the year 2018.
Particulars | Current Year | Future Taxable Amounts | Future Taxable Amounts | |||
2018 | 2019 | 2020 | 2021 | 2022 | Total | |
($ in Millions) | ||||||
Pre-tax accounting income | $33 | |||||
Less: Advance rent payment | (8) | 2 | 2 | 2 | 2 | 8 |
Taxable income | 25 | |||||
Enacted tax rate | ||||||
Income tax payable | 10(1) | |||||
Desired ending balance of deferred tax liability | 3.2 |
Table (1)
Computation of deferred tax liability
The following table shows the amount of deferred tax liability to be recorded in the journal entry
Particulars | Amount ($) (in millions) |
Desired ending balance of deferred tax liability | $3.2 |
Less: Beginning balance of deferred tax liability | (0) |
Change in balance | $3.2(2) |
Table (2)
The journal entry to record income taxes for 2018 is as follows:
Date | Account Title and Explanation | Post Ref. |
Debit ($) (in millions) |
Credit ($) (in millions) |
2018 | Income Tax Expense (3) | 13.2 | ||
Deferred Tax Liability (2) | 3.2 | |||
Income Tax Payable (1) | 10 | |||
(To record the income tax in 2018) |
Table (3)
Working Notes:
Compute income tax expense amount.
- Income Tax Expense is an expense account and it decreases the value of shareholders’ equity account. So, debit Income Tax Expense account with $13.2 million.
- Deferred tax liability is a liability and is increased by $3.2 million. Therefore, credit deferred tax liability account with $3.2 million.
- Income Tax Payable is a liability account has increased because the taxable income has increased. So, credit Income Tax Payable account with $10 million.
2.
The amount necessary to record A’s income taxes for 2019 and prepare journal entry.
2.
Explanation of Solution
Determination of Income Tax Payable.
The following table shows the taxable income and income tax payable for the year 2019.
Particulars | Current Year | Future Taxable Amounts | Future Taxable Amounts | ||
2019 | 2020 | 2021 | 2022 | Total | |
($ in Millions) | |||||
Pre-tax accounting income | $50 | ||||
Advance rent payment | 2 | 2 | 2 | 2 | 6 |
Taxable income | 52 | ||||
Enacted tax rate | |||||
Income tax payable | 20.8(4) | ||||
Desired ending balance of deferred tax liability | 2.4 |
Table (4)
Computation of deferred tax liability
The following table shows the amount of deferred tax liability to be recorded in the journal entry
Particulars | Amount ($) (in million) |
Desired ending balance of deferred tax liability | $2.4 |
Less: Beginning balance of deferred tax liability | $(3.2) |
Change in balance | $(0.8)(5) |
Table (5)
The journal entry to record income taxes for 2019 is as follows:
Date | Account Title and Explanation | Post Ref. |
Debit ($) (in millions) |
Credit ($) (in millions) |
2019 | Income Tax Expense (6) | 20 | ||
Deferred Tax Liability (5) | 0.8 | |||
Income Tax Payable (4) | 20.8 | |||
(To record the income tax in 2019) |
Table (6)
Working Notes:
Compute income tax expense amount.
- Income Tax Expense is an expense account and it decreases the value of shareholders’ equity account. So, debit Income Tax Expense account with $20 million.
- Deferred tax liability is a liability and is decreased by $0.8 million. Therefore, debit deferred tax liability account with $0.8 million.
- Income Tax Payable is a liability account has increased because the taxable income has increased. So, credit Income Tax Payable account with $20.8 million.
3.
The amount necessary to record A’s income taxes for 2019 assuming that the new tax rate is 30% to be enacted from 2020 and prepare journal entry.
3.
Explanation of Solution
Determination of Income Tax Payable.
The following table shows the taxable income and income tax payable for the year 2019.
Particulars | Current Year | Future Taxable Amounts | Future Taxable Amounts | ||
2019 | 2020 | 2021 | 2022 | Total | |
($ in Millions) | |||||
Pre-tax accounting income | $50 | ||||
Advance rent payment | 2 | 2 | 2 | 2 | 6 |
Taxable income | 52 | ||||
Enacted tax rate | |||||
Income tax payable | 20.8(7) | ||||
Desired ending balance of deferred tax liability | 1.8 |
Table (7)
Computation of deferred tax liability
The following table shows the amount of deferred tax liability to be recorded in the journal entry
Particulars | Amount ($) (in million) |
Desired ending balance of deferred tax liability | $1.8 |
Less: Beginning balance of deferred tax liability | $(3.2) |
Change in balance | $(1.4)(8) |
Table (8)
The journal entry to record income taxes for 2019 is as follows:
Date | Account Title and Explanation | Post Ref. |
Debit ($) (in millions) |
Credit ($) (in millions) |
2019 | Income Tax Expense (9) | 19.4 | ||
Deferred Tax Liability (8) | 1.4 | |||
Income Tax Payable (7) | 20.8 | |||
(To record the income tax in 2019) |
Table (9)
Working Notes:
Compute income tax expense amount.
- Income Tax Expense is an expense account and it decreases the value of shareholders’ equity account. So, debit Income Tax Expense account with $19.4 million.
- Deferred tax liability is a liability and is decreased by $1.4 million. Therefore, debit deferred tax liability account with $1.4 million.
- Income Tax Payable is a liability account has increased because the taxable income has increased. So, credit Income Tax Payable account with $20.8 million.
4.
To explain: The reason of having a difference in A’s income tax in 2019 when there is a change in the tax rate.
4.
Explanation of Solution
The income tax expense of A in 2019 without the tax rate change was $20 million but after the tax rate has been reduced from 40% to 30% it reduced to $19.4 million in 2019 because the tax on future taxable amount of $6 million needs to be adjusted to $0.6 million
So, the income tax expense after the tax rate changed in 2019 is $19.4 million
Want to see more full solutions like this?
Chapter 16 Solutions
SPICE ND LL INTERM ACCTG W/CONN+ AC
- Exercise 13-37 (LO. 7) On June 5, 2020, Brown, Inc., a calendar year taxpayer, receives cash of $750,000 from the county upon condemnation of its warehouse building (adjusted basis of $500,000 and fair market value of $750,000). Complete the statements below regarding what must Brown do to qualify for § 1033 postponement if the adjusted basis was instead $795,000. Because Brown has a realized loss on the condemnation of business property, it is automatically recognized . In this case, §1033 does not modify the normal rules of recognition. Therefore, Brown has a realized loss of $fill in the blank of which $fill in the blank is recognized. Feedbackarrow_forwardHw.5. Facts Ryan recently disposed Bitcoin but initially did not report this. After an ATO investigation, the ATO issued an Amended Notice of Amendment which reported that he would be liable to pay tax liability totalling $100,000 and this was due 1 January 2021. As Ryan did not have access to additional funds in the short term, Ryan was only able to pay the ATO debt 1 January 2022. Question Advise Ryan whether he can challenge the new liability imposed. Assuming Ryan cannot challenge the new liability imposed, advise what administrative penalty and interest charges Ryan will be subject to and what information need to be provided to request a penalty and interest charge reversal.arrow_forward4... 4 Sunland Company has the following two temporary differences between its income tax expense and income taxes payable. 2020 2021 2022 Pretax financial income $842,000 $956,000 $914,000 Excess depreciation expense on tax return (28,800 ) (39,300 ) (9,900 ) Excess warranty expense in financial income 20,400 9,500 7,600 Taxable income $833,600 $926,200 $911,700 The income tax rate for all years is 20%. (a) Assuming there were no temporary differences prior to 2020, prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2020, 2021, and 2022. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit 2020…arrow_forward
- P17–4 LEASE VERSUS PURCHASE JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 21% tax bracket, and its after-tax cost of debt is currently 8%. The terms of the lease and of the purchase are as follows: LEASE Annual end-of-year lease payments of $25,200 are required over the three-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $5,000 at termination of the lease. PURCHASE The equipment costs $60,000 and can be financed with a 14% loan requiring annual end-of-year payments of $25,844 for three years. JLB will depreciate the equipment under MACRS using a three-year recovery period. (See Table 4.2 for the applicable depreciation percentages.) JLB will pay $1,800 per year for a service contract that covers all maintenance costs; insurance and other costs will be borne by the JLB, who plans…arrow_forwardLO.2 Oak Corporation has the following general business credit carryovers. If the general business credit generated by activities during 2019 equals 36,000 and the total credit allowed during the current year is 60,000 (based on tax liability), what amounts of the current general business credit and carryovers are utilized against the 2019 income tax liability? What is the amount of unused credit carried forward to 2020?arrow_forwardCA10.3 (LO 2) (Capitalization of Interest) Vania Magazines started construction of a warehouse building for its own use at an estimated cost of $5,000,000 on January 1, 2019, and completed the building on December 31, 2019. During the construction period, Vania has the following debt obligations outstanding. Construction loan—12% interest, payable semiannually, issued December 31, 2018 $2,000,000 Short-term loan—10% interest, payable monthly, and principal payable at maturity, on May 30, 2020 1,400,000 Long-term loan—11% interest, payable on January 1 of each year; principal payable on January 1, 2022 1,000,000 Total cost amounted to $5,200,000, and the weighted average of accumulated expenditures was $3,500,000. Jane Esplanade, the president of the company, has been shown the costs associated with this construction project and capitalized on the balance sheet. She is bothered by the “avoidable interest” included in the cost. She argues that, first, all the…arrow_forward
- Intermediate Accounting ll ch 16 5. On January 1, 2021, Ameen Company purchased major pieces of manufacturing equipment for a total of $48 million. Ameen uses straight-line depreciation for financial statement reporting and MACRS for income tax reporting. At December 31, 2023, the book value of the equipment was $42 million and its tax basis was $32 million. At December 31, 2024, the book value of the equipment was $40 million and its tax basis was $25 million. There were no other temporary differences and no permanent differences. Pretax accounting income for 2024 was $30 million. Required: Prepare the appropriate journal entry to record Ameen’s 2024 income taxes. Assume an income tax rate of 25%. What is Ameen’s 2024 net income?arrow_forwardThe FICA Tax (LO 9.3) (COVID provisions) Yeet Inc. has 14 employees in 2020. Yeet’s 2020 second quarter business was 70 percent lower than 2019 due to COVID-related impacts. Yeet was able to stay in business and kept ten of the fourteen employees working and paid each of them $8,000 in the quarter. In a effort to show solidarity, Yeet paid the four nonworking employees the same amount also. Yeet did not take a PPP loan. Yeet will take an employee retention credit for: a.70 percent of the wages paid to all fourteen employees. b.50 percent of the wages paid to all fourteen employees, whether working or not. c.100 percent of the wages paid to the four nonworking employees. d.50 percent of the wages paid to the four nonworking employees. e.70 percent of the ten working employees.arrow_forwardRr.12. 1.) Calculate taxable income for 20X2 answer: 139,000 2.) Calculate taxes payable for 20X2 answer: 20,850 3.) Determine the current deferred tax liability at 12/31/X2 answer: 37200 4.) calculate total income tax expense for 20X2 answer: 58,050 5.) Compute net income after taxes for 20X2 answer: 328,950 6.) Calculate taxable income for 20X3 answer: 213,027 7.) The entry required at the end of 20X3 requires answer: debit DTL for 26,040 8.) Compute net income after taxes for 20X3 answer: ??? 9.) Calculate taxable income for 20X4 answer: 196,800 10.) Compute net income after taxes for 20X4 answer: ??? Using the information above, solve for parts 8 and 10arrow_forward
- BE19.2 (LO 1) Oxford Corporation began operations in 2020 and reported pretax financial income of $225,000 for the year. Oxford's tax depreciation exceeded its book depreciation by $40,000. Oxford's tax rate for 2020 and years thereafter is 30%. In its December 31, 2020, balance sheet, what amount of deferred tax liability should be reported? BE19.3 (LO 1, 2) Using the information from BE19.2, assume this is the only difference between Oxford's pretax financial income and taxable income. Prepare the journal entry to record the income tax expense, deferred income taxes, and income taxes payable, and show how the deferred tax liability will be classified on the December 31, 2020, balance sheet.arrow_forwardMa3. All final answers, unless otherwise indicated, have been rounded to the nearest $10. Also, assume that each question is independent of any other question. please answer questions using tax rules in effect for the year 2021, but ignoring temporary Covid-10 related changes. 8. During the year, Dan Davis, a single taxpayer, pays $2,200 of interest on a qualified student loan. Assume that Dan has adjusted gross income of $65,000. What student loan interest deduction may Dan claim on his Form 1040 for the year? A. $2,500 B. 2,200 C. 1,100 D. 0 E. None of the above 9. A contribution made to which of the listed entities is not deductible? A. Boy Scouts of America B. Oxford University, England C. Virginia Commonwealth University D. Society for the Prevention of Cruelty to Animals E. All of the above are deductiblearrow_forwardProblem 7-44 (LO 7-4) Haneen has taxable income of $124,000 without consideration of capital gain or loss transactions. Haneen has a short-term capital gain of $19,000, a long-term capital loss of $11,000, and a short-term capital gain of $5,000. Assume none of the gains or losses are from collectibles or unrecaptured § 1250 property, and Haneen is in the 24% tax bracket. Required: What is the total short-term gain or loss? What is the total long-term gain or loss? What is the carryover amount?arrow_forward
- Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT