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Acct 414
Deferred Tax Examples
Nice to have on paper as we work
problems during class
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Fundamentals of Accounting for Income Taxes
Illustration Assume the company reports revenue in
2007, 2008, and 2009 of $130,000, respectively.
The revenue is reported the same for both GAAP and
tax purposes. For simplification, assume the company
reports one expense, depreciation, over the three
years applying the straight-line method for financial
reporting purposes (GAAP) and MACRS (IRS) for the
tax return. What is the effect on the accounts of
using the two different depreciation methods?
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LO 1 Identify differences between pretax financial income and taxable income.
Book vs. Tax Difference
GAAP Reporting
Revenues
Expenses (S/L depreciation)
Pretax financial income
Income tax expense (40%)
Tax Reporting
Revenues
2007
2008
2009
Total
$130,000
$130,000
$130,000
$390,000
30,000
30,000
30,000
90,000
$100,000
$100,000
$100,000
$300,000
$40,000
$40,000
$40,000
$120,000
2007
2008
2009
Total
$130,000
$130,000
$130,000
$390,000
40,000
30,000
20,000
90,000
Pretax financial income
$90,000
$100,000
$110,000
$300,000
Income tax payable (40%)
$36,000
$40,000
$44,000
$120,000
Expenses (MACRS depreciation)
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LO 1 Identify differences between pretax financial income and taxable income.
Example – Deferred Tax Liability
• Assume that Sales Company recognizes $15,000 gross profit from
installment sales for financial accounting in 2006. The gross profit
will be taxable at $3,000 each year for the next five years. The
company earns $10,000 additional income each year and the tax
rate is 40%. The following schedule shows taxable income, income
tax payable, financial income, and income tax expense for the five
year period.
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Example – Deferred Tax Asset
Financial Magazine Company received $15,000 of
subscriptions in advance for 2006. Subscription revenue
will be recognized equally in 2007, 2008, and 2009, for
financial accounting purposes but all of the $15,000 will be
recognized in 2006 for tax purposes. There is additional
income of $50,000 each year and the tax rate is 40%.
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South Carolina Corporation
E19-1 South Carolina Corporation has one temporary
difference at the end of 2007 that will reverse and cause
taxable amounts of $55,000 in 2008, $60,000 in 2009, and
$65,000 in 2010. South Carolina’s pretax financial income
for 2007 is $300,000, and the tax rate is 30% for all years.
There are no deferred taxes at the beginning of 2007.
Instructions
a) Compute taxable income and income taxes payable for 2007.
b) Prepare the journal entry to record income tax expense,
deferred income taxes, and income taxes payable for 2007.
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Columbia Corporation
Columbia Corporation has one temporary difference
at the end of 2007 that will reverse and cause
deductible amounts of $50,000 in 2008, $65,000 in
2009, and $40,000 in 2010. Columbia’s pretax
financial income for 2007 is $200,000 and the tax
rate is 34% for all years. There are no deferred
taxes at the beginning of 2007. Columbia expects
to be profitable in the future.
Instructions
a) Compute taxable income and income taxes payable for 2007.
b) Prepare the journal entry to record income tax expense,
deferred income taxes, and income taxes payable for 2007.
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Zoop Inc. (NOL)
Zoop Inc. incurred a net operating loss of
$500,000 in 2007. Taxable income was
$200,000 for 2005 and $200,000 for 2006.
The tax rate for all years is 40%. Zoop elects
the carryback option. Prepare the journal
entries to record the benefits of the loss
carryback and the loss carryforward.
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Zoop Inc. (Variation)
Now assume that it is more likely than not
that the entire net operating loss
carryforward will not be realized by Zoop
Inc. in future years. Prepare all the
journal entries necessary at the end of
2007.
9
Valis Corporation (NOL)
Valis Corporation had the following tax information.
Year
Taxable
Income
Tax
Rate
Taxes
Paid
2004
$ 300,000
35%
$ 105,000
2005
325,000
30%
97,500
2006
400,000
30%
120,000
In 2007 Valis suffered a net operating loss of
$450,000, which it elected to carry back. The
2007 enacted tax rate is 29%. Prepare Valis’s entry
to record the effect of the loss carryback.
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Example:
Revision of Future Tax Rate
At the end of 2002, the corporate tax rate is
changed from 40% to 35%. The new rate is
effective January 1, 2004.
The deferred tax account (1/1/2002) is as
follows:
Excess tax depreciation:
$3 million
Deferred tax liability:
$1.2 million
Related taxable amounts are expected to occur
equally over 2003, 2004, and 2005.
Provide the journal entry to reflect the change.
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Review Problem
Zurich Company reports pretax financial income of $70,000 for
2007. The following items cause taxable income to be different
than pretax financial income. (1) Depreciation on the tax return
is greater than depreciation on the income statement by
$16,000. (2) Rent collected on the tax return is greater than
rent earned on the income statement by $22,000. (3) Fines for
pollution appear as an expense of $11,000 on the income
statement.
Zurich’s tax rate is 30% for all years, and the company expects
to report taxable income in all future years. There are no
deferred taxes at the beginning of 2007.
Instructions Prepare the journal entry to record income tax
expense, deferred income taxes, and income taxes payable for
2007.
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