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

Nespa, Inc., has a deferred tax liability on its balance sheet in the amount of $25 million. A change in tax laws has increased future tax rates for Nespa. The impact of this increase in tax rate will be:

A) a decrease in deferred tax liability and a decrease in tax expense.

B) a decrease in deferred tax liability and an increase in tax expense.

C) an increase in deferred tax liability and an increase in tax expense.

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An increase in tax rates will increase future deferred tax liability, and the impact of the increase in liability will be reflected in the income statement of the year in which the tax rate change is effected.

1215

Kruger Associates uses an accrual basis for financial reporting purposes and cash basis for tax purposes. Cash collections from customers are $476,000, and accrued revenue is only $376,000. Assume expenses at 50% in both cases (i.e., $238,000 on cash basis and $188,000 on accrual basis), and a tax rate of 34%. What is the deferred tax asset or liability? A deferred tax:

A) asset of $17,000.

B) asset of $48,960.

C) liability of $17,000.

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Since taxable income ($238,000) exceeds pretax income ($188,000), Kruger will have a deferred tax asset of $17,000 [($238,000 ? $188,000)(0.34)].

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 net income and depreciation expense for year one for financial reporting purposes?

Net Income

Depreciation Expense

A) $2,535 $3,169

B) $2,748 $2,535

C) $4,657 $2,748

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Net income in year 1 for financial reporting purposes will be $2,748 = [($7,192 ? $2,535)(1 ? 0.41)]

The annual depreciation expense on financial statements will be $2,535 = ($12,676 / 5 years)

1215

Corcoran Corp acquired an asset on 1 January 2004, for $500,000. For financial reporting, Corcoran will depreciate the asset using the straight-line method over a 10-year period with no salvage value. For tax purposes the asset will be depreciated straight line for five years and Corcoran’s effective tax rate is 30%. Corcoran’s deferred tax liability for 2004 will:

A) decrease by $50,000.

B) increase by $15,000.

C) decrease by $15,000.

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Straight-line depreciation per financial reports = 500,000 / 10 = $50,000

Tax depreciation = 500,000 / 5 = $100,000

Temporary difference = 100,000 ? 50,000 = $50,000

Deferred tax liability will increase by $50,000 × 30% = $15,000

1215

On its financial statements for the year ended December 31, Jackson, Inc. listed $2,000,000 in post retirement benefits expense. Jackson, Inc. contributed $200,000 of the expense to its retirement plan during the year. Tax law recognizes cash contributions to a pension account as tax deductible, but not expense accruals. Jackson’s tax rate is 40%.

For the year ended December 31, Jackson, Inc. should show, based on the above, an increase in its deferred tax:

A) asset account of $720,000.

B) liability account of $720,000.

C) liability account of $80,000.

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Jackson’s post-retirement benefits expense will decrease income tax expense by $2,000,000 × 0.40 = $800,000. The cash contribution will decrease income taxes payable by $200,000 × 0.40 = $80,000. Because taxes payable will exceed income tax expense, the difference of $800,000 ? $80,000 = $720,000 is an increase in the deferred tax asset account.

1215

A dance club purchased new sound equipment for $25,352. It will work for 5 years and has no salvage value. Their tax rate is 41%, and their annual revenues are constant at $14,384. 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 that the tax rate changes for years 4 and 5 from 41% to 31%. What will be the deferred tax liability as of the end of year three?

A) $3,144.

B) $1,039.

C) $2,948.

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Straight-line depreciation = $25,352 / 5 = $5,070. Income using straight-line depreciation = $14,384 ? $5,070 = $9,314. Accelerated depreciation (years 1 and 2) = 0.35($25,352) = $8,873. Income (years 1 and 2) = $14,384 ? $8,873 = $5,511. Accelerated depreciation (year 3) = 0.3($25,352) = $7,606. Income (year 3) = $14,384 ? $7,606 = $6,778.

Deferred tax liability at the end of year three, after the change in the expected tax rate, will be $3,144:

DTL for year 1 = $1,178.93 = [($9,314 ? $5,511)(0.31)].
DTL for year 2 = $1,178.93 = [($9,314 ? $5,511)(0.31)].
DTL for year 3 = $786.16 = [($9,314 ? $6,778)(0.31)]
$1,178.93 + $1,178.93 + $786.16 = $3,144

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Because the tax rate changes for years 4 and 5 from 41% to 31%, net income will have to be adjusted for financial reporting purposes in year three. What is the amount of this adjustment?

A) $1,030.

B) $747.

C) $1,014.

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The deferred tax liability will decrease by $1,014 = ($4,158 ? $3,144) due to the new lower tax rate. An adjustment of $1,014 in tax expense will result in an increase in net income by the same amount of $1,014.
Deferred tax liability at the end of year 3 with tax rate of 41% = $4,158.
Deferred tax liability at the end of year 3 with tax rate of 31% = $3,144.

1215

Year ending 31 December:		2002	2003	2004
Income Statement:
	Revenues after all expenses other than depreciation	$200	$300	$400
	Depreciation expense	50	50	50
	Income before income taxes	$150	$250	$350
Tax return:
	Taxable income before depreciation expense	$200	$300	$400
	Depreciation expense	75	50	25
	Taxable income	$125	$250	$375

Assume an income tax rate of 40% and zero deferred tax liability on 31 December 2001.

The deferred tax liability to be shown in the 31 December 2003, balance sheet and the 31 December 2004 balance sheet, is:

2003

2004

A) $0 $10

B) $25 $20

C) $10 $0

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First, for 2003, remember that the deferred tax liability (DTL) is cumulative so, it includes the balance from prior years, (assume 2002 in this example since we have no other information).

DTL cumulative = (tax return depreciation – financial statement depreciation) × tax rate + DTL from previous year

• DTL for 2002: (75 – 50) × 0.4 + 0 = 10
• DTL for 2003: (50 – 50) × 0.4 + 10 = 10
• DTL for 2004: (25 – 50) × 0.4 + 10 = 0

1215

Camphor Associates uses accrual basis for financial reporting purposes and cash basis for tax purposes. Cash collections from customers is $238,000, and accrued revenue is only $188,000. Assume expenses at 50% in both cases (i.e., $119,000 on cash basis and $94,000 on accrual basis), and a tax rate of 34%. What is the deferred tax asset/liability in this case? A deferred tax:

A) asset of $8,500.

B) asset of $48,960.

C) liability of $8,500.

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Since taxable income ($119,000) exceeds pretax income ($94,000), Camphor will have a deferred tax asset of $8,500 = [($119,000 ? $94,000)(0.34)].

1215

This year, Blue Horizon has recorded $390,000 in revenue for financial reporting purposes, but, on a cash basis, revenue was only $262,000. Assume expenses at 50% in both cases (i.e., $195,000 on accrual basis and $131,000 on cash basis), and a tax rate of 34%. What is the deferred tax liability or asset? A deferred tax:

A) liability of $21,760.

B) liability of $16,320.

C) asset of $21,760.

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Since pretax income ($195,000) exceeds the taxable income ($131,000), Blue Horizon will have a deferred tax liability of $21,760 [($195,000 ? $131,000)(0.34)].