Concept explainers
During 2019, Cooke reported pretax financial income of $51,500 and taxable income of $44,000. The depreciation temporary difference caused the difference between the two income amounts. The tax rate in 2019 was 30%, and no change in the tax rate had been enacted for future years.
Required:
- 1. Prepare a schedule that shows for each year, 2019 through 2026, (a) MACRS depreciation, (b) straight line depreciation, (c) the annual depreciation temporary difference, and (d) the accumulated temporary difference at the end of each year.
- 2. Prepare a schedule that computes for each year, 2019 through 2026, (a) the ending deferred tax liability and (h) the change in the deferred tax liability.
- 3. Prepare Cooke’s income tax
journal entry at the end of 2019. - 4. Next Level Explain what happens to the balance of the deferred tax liability at the end of 2019 through 2026.
1(a)
Prepare a schedule that shows MACRS depreciation from 2019 through 2026.
Explanation of Solution
Prepare a schedule that shows MACRS depreciation from 2019 through 2026:
Year | MACRS Depreciation rate | MACRS Depreciation (Tax purpose) |
(1) | ||
2019 | 20% | $20,000 |
2020 | 32% | $32,000 |
2021 | 19.20% | $19,200 |
2022 | 11.52% | $11,520 |
2023 | 11.52% | $11,520 |
2024 | 5.76% | $5,760 |
2025 | 0% | $0 |
2026 | 0% | $0 |
Table (1)
1 (b)
Prepare a schedule that shows straight line depreciation from 2019 through 2026.
Explanation of Solution
Straight-line Depreciation: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:
Prepare a schedule that shows straight line depreciation from 2019 through 2026.
Given, the cost of the asset is $100,000 and the estimated useful life is 8 years. So, the straight line depreciation is $12,500
Year | Straight line Depreciation (Financial reporting purpose) |
2019 | $12,500 |
2020 | $12,500 |
2021 | $12,500 |
2022 | $12,500 |
2023 | $12,500 |
2024 | $12,500 |
2025 | $12,500 |
2026 | $12,500 |
Table (2)
1 (c)
Prepare a schedule that shows the annual depreciation temporary difference from 2019 through 2026.
Explanation of Solution
Temporary Difference: Temporary difference refers to the difference of one income recognized by the tax rules and accounting rules of a company in different periods. Consequently the difference between the amount of assets and liabilities reported in the financial reports and the amount of assets and liabilities as per the company’s tax records is known as temporary difference.
Prepare a schedule that shows the annual depreciation temporary difference from 2019 through 2026:
Year | MACRS Depreciation rate | Straight line Depreciation (Financial reporting purpose) | Temporary difference of annual depreciation |
2019 | 20% | $12,500 | $7,500 |
2020 | 32% | $12,500 | $19,500 |
2021 | 19.20% | $12,500 | $6,700 |
2022 | 11.52% | $12,500 | ($980) |
2023 | 11.52% | $12,500 | ($980) |
2024 | 5.76% | $12,500 | ($6,740) |
2025 | 0% | $12,500 | ($12,500) |
2026 | 0% | $12,500 | ($12,500) |
Table (3)
1 (d)
Prepare a schedule that shows the accumulated temporary difference from 2019 through 2026.
Explanation of Solution
Prepare a schedule that shows the accumulated temporary difference from 2019 through 2026:
Year | Temporary difference of annual depreciation | Accumulated Temporary difference |
2019 | $7,500 | $7,500 |
2020 | $19,500 | $27,000 |
2021 | $6,700 | $33,700 |
2022 | ($980) | $32,720 |
2023 | ($980) | $31,740 |
2024 | ($6,740) | $25,000 |
2025 | ($12,500) | $12,500 |
2026 | ($12,500) | $0 |
Table (4)
Note: The temporary difference is computed in Table (3) of requirement 1 (c).
2 (a)
Prepare a schedule that calculates the ending deferred tax liability from 2019 through 2026.
Explanation of Solution
Deferred tax liability: Deferred tax liability is created, if the tax obligation (income tax payable) is deferred temporarily due to differences in reporting revenue or expense at different time periods on the income statement (financial reporting) and on tax return (tax reporting).
Prepare a schedule that calculates the ending deferred tax liability from 2019 through 2026:
Year | Accumulated Temporary difference | Tax rate | Ending deferred tax liability |
2019 | $7,500 | 30% | $2,250 |
2020 | $27,000 | 30% | $8,100 |
2021 | $33,700 | 30% | $10,110 |
2022 | $32,720 | 30% | $9,816 |
2023 | $31,740 | 30% | $9,522 |
2024 | $25,000 | 30% | $7,500 |
2025 | $12,500 | 30% | $3,750 |
2026 | $0 | 30% | $0 |
Table (5)
Note: The accumulated temporary difference is computed in requirement 1 (d).
2 (b)
Prepare a schedule that calculates the changes in deferred tax liability from 2019 through 2026.
Explanation of Solution
Prepare a schedule that calculates the changes in deferred tax liability from 2019 through 2026:
Year | Ending deferred tax liability | Beginning deferred tax liability | Change in deferred tax liability |
2019 | $2,250 | $0 | 2,250 |
2020 | $8,100 | $2,250 | 5,850 |
2021 | $10,110 | $8,100 | 2,010 |
2022 | $9,816 | $10,110 | (294) |
2023 | $9,522 | $9,816 | (294) |
2024 | $7,500 | $9,522 | (2,022) |
2025 | $3,750 | $7,500 | (3,750) |
2026 | $0 | $3,750 | (3,750) |
Table (6)
Note: The ending deferred tax liability is computed in requirement 2 (a) and the ending deferred tax liability of 2019 is the beginning deferred tax liability for 2020 and so on
3.
Record the income tax journal entry at the end of 2019 for Company C.
Explanation of Solution
Record the income tax journal entry at the end of 2019 for Company C.
Date | Account title and Explanation | Post ref. | Amount | |
Debit | Credit | |||
2019 | ||||
December 31 | Income tax expense (1) | $15,450 | ||
Income tax payable (2) | $13,200 | |||
Deferred tax liability | $2,250 | |||
(To record the income tax payable ) |
Table (7)
- Income tax expense is an expense that decreases the stockholder’s equity and it is increased. Thus, it is debited.
- Income tax Payable is a liability and it is increased. Thus, it is credited.
- Deferred tax liability is a liability and it is increased. Thus, it is credited.
Working note 1: Determine the income tax expense:
Working note 2: Determine the income tax payable:
Given, the taxable income is $44,000 and the tax rate is 30%.
Note: The deferred tax liability is $2,250 for year 2019 as computed in Table (6).
4.
Elaborate the effects of the balance of deferred tax liability from 2019 through 2026.
Explanation of Solution
As per table (5), the balance of the deferred tax liability account increases (originates) at the end of 2019 from $2,250 to $10,110 in 2021 , and then declines (reverses) at the end of 2022 through 2026, which reduces to zero at the end of 2026.
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Chapter 18 Solutions
Intermediate Accounting: Reporting And Analysis
- At the beginning of 2019, Conley Company purchased an asset at a cost of 10,000. For financial reporting purposes, the asset has a 4-year life with no residual value and is depreciated by the straight-line method beginning in 2019. For tax purposes, the asset is depreciated under MACRS using a 5-year recovery period. Prior to 2019, Conley had no deferred tax liability or asset. The difference between depreciation for financial reporting purposes and income tax purposes is the only temporary difference between pretax financial income and taxable income. The current income tax rate is 30%, and no change in the tax rate has been enacted for future years. In 2019 and 2020, taxable income will be higher or lower than financial income by what amount?arrow_forwardDeferred Tax Liability: Depreciation Gire Company began operations at the beginning of 2019 at which time it purchased a depreciable asset for 60, 000. For 2019 through 2022, the asset was depreciated on the straight-line basis over a 4-year life (no residual value) for financial reporting. For income tax purposes, the asset was depreciated using MACRS (200%, 3-year life). For 2019 through 2022, Gire reported pretax financial income and taxable income of the following amounts (the differences are due solely to the depreciation temporary differences): Over the entire 4-year period, Gire was subject to an income tax of 30%, and no change in the tax rate had been enacted for future years. Required: 1. Prepare a schedule that shows for each year, 2019 through 2022, the (a) MACRS depreciation, (b) straight-line depreciation, (c) annual depreciation temporary difference, and (d) accumulated temporary difference at the end of each year. 2. Prepare Gires income tax journal entry at the end of (a) 2019, (b) 2020, (c) 2021, and (d) 2022. (Round to the nearest dollar.) 3. Prepare the lower portion of Gires income statement for (a) 2019, (b) 2020, (c) 2021, and (d) 2022.arrow_forwardDeferred Tax Asset and Valuation Account Zeta Corporation reported taxable income for 2019 of 200,000. The enacted tax rate for 2019 is 40%. During 2019, Zeta became the defendant in a lawsuit. The lawsuit has not been resolved at the end of the period, but Zetas lawyers believe that it is probable that the company will be held liable. The legal office estimated that the amount of loss will IK 80,000. AS a result, the lawsuit has been recognized as a contingent liability. However, the legal obligation is not deductible for tax purposes during 2019. The lawsuit represents the only difference between financial income and taxable income for the year. Required: 1. Assume that Zeta Corporation has been quite profitable in past periods and expects to continue that pattern in the future. Record a journal entry to recognize tax expense, tax payable, and deferred tax for 2019. 2. Assume that there is substantial doubt about whether Zeta Corporation will be profitable in future periods. As a result, the company believes that one-half of the future deduction for legal costs will not be realized. Record a journal entry to recognize tax expense, tax payable, and deferred tax for the year. 3. Next Level Explain what circumstances require that a valuation allowance account should be utilized when deferred tax is recognized. How should that account be presented on the financial statements? 4. Prepare your answer to Requirement 2 assuming that Zeta prepares financial statements according to IFRS.arrow_forward
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