Explain the meaning of a temporary difference as it relates to deferred tax computations, and give three examples.
Deferred tax is the type of liability reported under the income statement and the company's balance sheet.
The temporary difference in tax computations arises due to the difference in the amounts of pretax financial income and the total taxable income for the current financial year in an organization. The payments are offset against the previous income of the organization.
(1) Interest received following the municipal bonds.
(2) Premium paid by the organizations on the LIC policies.
(3) Penalty (or fines) paid because of country or accounting law violation.
The pretax financial income of Truttman Company differs from its taxable income throughout each of 4 years as follows. Pretax Taxable Year Financial Income Income Tax Rate 2017 $290,000 $180,000 35% 2018 320,000 225,000 40 2019 350,000 260,000 40 2020 420,000 560,000 40
Pretax financial income for each year includes a nondeductible expense of $30,000 (never deductible for tax purposes). The remainder of the difference between pretax financial income and taxable income in each period is due to one depreciation temporary difference. No deferred income taxes existed at the beginning of 2017. Instructions (a) Prepare journal entries to record income taxes in all 4 years. Assume that the change in the tax rate to 40% was not enacted until the beginning of 2018. (b) Prepare the income statement for 2018, beginning with Income before income taxes.
Which of the following statements is correct with regard to IFRS and GAAP? (a) Under GAAP, all potential liabilities related to uncertain tax positions must be recognized. (b) The tax effects related to certain items are reported in equity under GAAP; under IFRS, the tax effects are charged or credited to income. (c) IFRS uses an affirmative judgment approach for deferred tax assets, whereas GAAP uses an impairment approach for deferred tax assets. (d) IFRS classifies deferred taxes based on the classification of the asset or liability to which it relates.
During 2017, Kate Holmes Co.’s first year of operations, the company reports pretax financial income at $250,000. Holmes’s enacted tax rate is 45% for 2017 and 40% for all later years. Holmes expects to have taxable income in each of the next 5 years. The effects on future tax returns of temporary differences existing at December 31, 2017, are summarized as follows. Future Years 2018 2019 2020 2021 2022 Total Future taxable (deductible) amounts: Installment sales $32,000 $32,000 $32,000 $ 96,000 Depreciation 6,000 6,000 6,000 $6,000 $6,000 30,000 Unearned rent (50,000) (50,000) (100,000) Instructions (a) Complete the schedule below to compute deferred taxes at December 31, 2017. (b) Compute taxable income for 2017. (c) Prepare the journal entry to record income taxes payable, deferred taxes, and income tax expense for 2017. Future Taxable December 31, 2017 (Deductible) Tax Deferred Tax Temporary Difference Amounts Rate (Asset) Liability Installment sales $ 96,000 Depreciation 30,000 Unearned rent (100,000) Totals $
Dexter Company appropriately uses the asset-liability method to record deferred income taxes. Dexter reports depreciation expense for certain machinery purchased this year using the modified accelerated cost recovery system (MACRS) for income tax purposes and the straight-line basis for financial reporting purposes. The tax deduction is the larger amount this year. Dexter received rent revenues in advance this year. These revenues are included in this year’s taxable income. However, for financial reporting purposes, these revenues are reported as unearned revenues, a current liability. Instructions (a) What are the principles of the asset-liability approach?
The accounting records of Shinault Inc. show the following data for 2017 (its first year of operations).
1. Life insurance expense on officers was $9,000.
2. Equipment was acquired in early January for $300,000. Straight-line depreciation over a 5-year life is used with no salvage value. For tax purposes, Shinault used a 30% rate to calculate depreciation.
3. Interest revenue on State of New York bonds totaled $4,000.
4. Product warranties were estimated to be $50,000 in 2017. Actual repair and labor costs related to the warranties in 2017 were $10,000. The remainder is estimated to be paid evenly in 2018 and 2019.
5. Gross profit on an accrual basis was $100,000. For tax purposes, $75,000 was recorded on the installment-sales method.
6. Fines incurred for pollution violations were $4,200.
7. Pretax financial income was $750,000. The tax rate is 30%.
Instructions (a) Prepare a schedule starting with pretax financial income in 2017 and ending with taxable income in 2017. (b) Prepare the journal entry for 2017 to record income taxes payable, income tax expense, and deferred income taxes.
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