Reading 38: Income Taxes-LOS d 习题精选 2011, statements, interpret, related, change

1215

Session 9: Financial Reporting and Analysis: Inventories, Long-lived Assets, Income Taxes, and Non-current Liabilities
Reading 38: Income Taxes

LOS d: Calculate income tax expense, income taxes payable, deferred tax assets, and deferred tax liabilities, and calculate and interpret the adjustment to the financial statements related to a change in the income tax rate.

 

 

Given the following data regarding two firms under different scenarios, determine the amount of any deferred tax liability or asset.

Firm 1:

Tax Reporting		Financial Reporting
Revenue	$500,000	Revenue	$500,000
Depreciation	$100,000	Depreciation	$50,000
Taxable income	$400,000	Pretax income	$450,000
Taxes payable	$160,000	Tax expense	$180,000
Net income	$240,000	Net income	$270,000

Firm 2:

Tax Reporting		Financial Reporting
Revenue	$500,000	Revenue	$500,000
Warranty expense	$0	Warranty expense	$10,000
Taxable income	$500,000	Pretax income	$490,000
Taxes payable	$200,000	Tax expense	$196,000
Net income	$300,000	Net income	$294,000

Firm 1 Deferred Tax:

Firm 2 Deferred Tax:

A) $30,000 Asset $6,000 Asset

B) $20,000 Asset $6,000 Liability

C) $20,000 Liability $4,000 Asset

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A deferred tax liability and asset is created when an income or expense item is treated differently on financial statements than it is on the company’s tax returns.

A deferred tax liability is when that difference results in greater tax expense on the financial statements than taxes payable on the tax return.

The deferred tax liability for firm 1 = $180,000 tax expense - $160,000 taxes payable = $20,000

A deferred tax asset is when that difference results in lower taxes payable on the financial statements than on the tax return.

The deferred tax asset for firm 2 = $200,000 taxes payable - $196,000 tax expense = $4,000

1215

A company purchased a new pizza oven directly from Italy for $12,675. It will work for 5 years and has no salvage value. The tax rate is 41%, and annual revenues are constant at $7,192. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is accelerated to 35% in years 1 and 2, and 30% in year 3. For purposes of this exercise ignore all expenses other than depreciation.

Assume the tax rate for years 4 and 5 changed from 41% to 31%. What will be the deferred tax liability as of the end of year 3 and the resulting adjustment to net income in year 3 for financial reporting purposes due to the change in the tax rate?

Deferred Tax Liability

Net Income

A) $1,572 $507

B) $1,572 $747

C) $1,039 $507

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Straight-line depreciation is $12,675 / 5 = $2,535.
Financial statement income is $7,192 ? $2,535 = $4,657.
Accelerated depreciation is $12,675(0.35) = $4,436 in years 1 and 2 and $12,675(0.3) = $3,803 in year 3.
Taxable income is $7,192 ? $4,436 = $2,756 in years 1 and 2 and $7,192 ? $3,803 = $3,389 in year 3.

At the old tax rate of 41%:
Deferred Tax liability for year 1 = $779.41 [($4,657 ? $2,756)(0.41)]
Deferred Tax liability for year 2 = $779.41 [($4,657 ? $2,756)(0.41)]
Deferred Tax liability for year 3 = $519.88 [($4,657 ? $3,389)(0.41)]
Deferred tax liability at the end of year 3, before the change in tax rate, is $2,079 = ($779.41 + $779.41 + $519.88)

At the new tax rate of 31%:
Deferred Tax liability for year 1 = $589.31 [($4,657 ? $2,756)(0.31)]
Deferred Tax liability for year 2 = $589.31 [($4,657 ? $2,756)(0.31)]
Deferred Tax liability for year 3 = $393.08 [($4,657 ? $3,389)(0.31)]
Deferred tax liability at the end of year 3, after the change in tax rate, will be $1,572 = ($589.31 + $589.31 + $393.08)

The deferred tax liability will decrease by $507 = ($2,079 ? $1,572) due to the new lower tax rate. An adjustment of $507 in tax expense will result in increase in net income by the same amount $507.

Another way of answering this question is as follows:

The deferred tax liability is the cost of the oven multiplied by the difference in the amount of depreciation at the end of year 3 between accelerated depreciation (100%) and straight line (60%) depreciation methods multiplied by the tax rate ((12,675 × 0.4) × 0.31 = $1,572).

The change in net income due to the change in tax rates is the cost of the oven multiplied by the difference in the amount of depreciation at the end of year 3 multiplied by the difference in tax rates (12,675 × 0.4 × (0.41 ? 0.31) = 507).

1215

Laser Tech has net temporary differences between tax and book income resulting in a deferred tax liability of $30.6 million. According to U.S. GAAP, an increase in the tax rate would have what impact on deferred taxes and net income, respectively:

Deferred Taxes

Net Income

A) Increase Decrease

B) Increase No effect

C) No effect Decrease

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If tax rates rise then deferred tax liabilities will also rise.  The increase in deferred tax liabilities will increase the current tax expense, and if expenses are increasing the net income will decrease.

1215

A firm purchased a piece of equipment for $6,000 with the following information provided:

• Revenue will increase by $15,000 per year.
• The equipment has a 3-year life expectancy and no salvage value.
• The firm's tax rate is 30%.
• Straight-line depreciation is used for financial reporting and double declining is used for tax purposes.

What will the firm report for deferred taxes on the balance sheet for years 1 and 2?

Year 1

Year 2

A) $3,900 $3,900

B) $600 $400

C) $3,300 $4,100

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Using DDB:

	Yr. 1	Yr. 2
Revenue	15,000	15,000
Dep.	4,000	1,333
Taxable Inc	11,000	13,667
Taxes Pay	3,300	4,100

Using SL:

	Yr. 1	Yr. 2
Revenue	15,000	15,000
Dep.	2,000	2,000
Pretax Inc	13,000	13,000
Tax Exp	3,900	3,900

Deferred taxes year 1 = 3,900 – 3,300 = 600

Deferred taxes year 2 = 3,900 – 4,100 + previously deferred taxes = -200 + 600 = 400

1215

A firm purchased a piece of equipment for $6,000 with the following information provided:

• Revenue will increase by $15,000 per year.
• The equipment has a 3-year life expectancy and no salvage value.
• The firm's tax rate is 30%.
• Straight-line depreciation is used for financial reporting and double declining balance is used for tax purposes.

Calculate the incremental income tax expense for financial reporting for years 1 and 2.

Year 1

Year 2

A) $3,300 $4,100

B) $600 -$200

C) $3,900 $3,900

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Using SL:

	Yr. 1	Yr. 2
Revenue	15,000	15,000
Dep.	2,000	2,000
Pretax income	13,000	13,000
Tax Expense	3,900	3,900

1215

If a firm overestimates its warranty expenses, which of the following results is least likely?

A) A deferred tax asset will result.

B) A timing difference will result between tax and financial reporting.

C) Income tax expense will be greater than taxes payable.

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Income tax expense will be less than taxes payable because the firm can only recognize warranty expense as they occur. Thus, if the warranty expenses are overestimated on the financial statements income tax expense will be less that taxes payable.

1215

Selected information from Kentucky Corp.’s financial statements for the year ended December 31 was as follows (in $ millions):

Property, Plant & Equip.	10		Deferred Tax Liability	0.6
Accumulated Depreciation	(4)

The balances were all associated with a single asset.  The asset was permanently impaired and has a present value of future cash flows of $4 million.  After Kentucky writes down the asset, Kentucky’s tax accounts will be affected as follows (the tax rate is 40%):

A) taxes payable will decrease $800,000.

B) deferred tax liability will be eliminated and deferred tax assets will increase $200,000.

C) deferred tax liability will be eliminated and deferred tax assets will increase $1.4 million.

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A permanently impaired asset must be written down to the present value of its future cash flows. The asset’s carrying value of ($10 ? $4 =) $6 million must be reduced by $2 million to $4 million. An impaired value write-down reduces net income for accounting purposes, but not for tax purposes until the asset is sold or disposed of, so taxes payable do not decrease. At a 40% tax rate, the eventual writedown for tax purposes of $2 million will cause $800,000 of changes in deferred tax items. The $600,000 deferred tax liability associated with this asset is eliminated and a deferred tax asset of $200,000 is established.

1215

For the year ended 31 December 2004, Pick Co's pretax financial statement income was $400,000 and its taxable income was $300,000. The difference is due to the following:

Interest on tax-exempt municipal bonds		$140,000
Premium expense on key person life insurance		$(40,000)
	Total	$100,000

Pick's statutory income tax rate is 30 percent. In its 2004 income statement, what amount should Pick report as current provision for tax payable?

A) $102,000.

B) $120,000.

C) $90,000.

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According to SFAS 109, Current provision = statutory rate × taxable income

30% = Taxes Payable / $300,000

= 0.30 × $300,000

= $90,000

1215

A company purchased a new pizza oven directly from Italy for $12,676. It will work for 5 years and has no salvage value. The tax rate is 41%, and annual revenues are constant at $7,192. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is accelerated to 35% in years 1 and 2, and 30% in year 3. For purposes of this exercise ignore all expenses other than depreciation.

What is the tax payable for year one?

A) $1,909.

B) $1,130.

C) $779.

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Tax payable for year 1 will be $1,130 = [{$7,192 ? ($12,676 × 0.35)} × 0.41]

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What is the deferred tax liability as of the end of year one?

A) $780.

B) $1,129.

C) $1,909

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The deferred tax liability for year 1 will be $780.
Pretax Income = $4,657 = ( $7,192 ? $2,535)
Taxable Income = $2,755 = ($7,192 ? $4,437)
Deferred Tax liability = $780 = [($4,657 ? $2,755)(0.41)]

Alternative solution:
The difference in depreciation at the end of year one is $12,676 × (0.35 ? 0.20) = $1901.
Deferred tax liability = difference in depreciation × tax rate = $1901 × 0.41 = $780.

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What is the deferred tax liability as of the end of year three?

A) $1,029.

B) $780.

C) $2,079.

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The deferred tax liability at the end of year 3 will be $2,079 = ($780 + $780 + $519).
Pretax Income = $4,657( $7,192 ? $2,535)
Taxable Income = $3,389[$7,192 ? ($12,676 × 0.30)]
Deferred Tax liability for year 3 = $519[($4,657 ? $3,389)(0.41)]

Deferred Tax liability for year 1 = $780[($4,657 ? $2,755)(0.41)]
Deferred Tax liability for year 2 = $780[($4,657 ? $2,755)(0.41)]

Alternative solution:
For tax purposes the machine is 100% depreciated out at the end of year three, while for GAAP it is only 60% depreciated.
The difference in depreciation is $12,676 × (1.00 ? 0.60) = $5070.
Deferred tax liability = difference in depreciation × tax rate = $5070 × 0.41 = $2079.

1215

An analyst gathered the following information about a company:

• Taxable income = $100,000.
• Pretax income = $120,000.
• Current tax rate = 20%.
• Tax rate when the reversal occurs will be 10%.

What is the company's tax expense?

A) $24,000.

B) $22,000.

C) $10,000.

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Deferred tax liability = (120,000 ? 100,000) × 0.1 = 2,000

Tax expense = current tax rate × taxable income + deferred tax liability

0.2 × 100,000 + 2,000 = 22,000