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Bandung Corporation began 2007 with a $92,000 balance in the

(One Temporary Difference, Future Taxable Amounts, One Rate, Beginning Deferred Taxes) Bandung Corporation began 2007 with a $92,000 balance in the Deferred Tax Liability account. At the end of 2007, the related cumulative temporary difference amounts to $350,000, and it will reverse evenly over the next 2 years. Pretax accounting income for 2007 is $525,000, the tax rate for all years is 40%, and taxable income for 2007 is $405,000.

Instructions

1. Compute income taxes payable for 2007.
2. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2007.
3. Prepare the income tax expense section of the income statement for 2007 beginning with the line â??Income before income taxes.â??

(Identify Temporary or Permanent Differences) Listed below are items that are commonly accounted for differently for financial reporting purposes than they are for tax purposes.

Instructions

For each item below, indicate whether it involves:

1. A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
2. A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
3. A permanent difference.
Use the appropriate number to indicate your answer for each.
A. The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes for some plant assets.
B. A landlord collects some rents in advance. Rents received are taxable in the period when they are received
C. Expenses are incurred in obtaining tax-exempt income.
D. Costs of guarantees and warranties are estimated and accrued for financial reporting purposes.
E. Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes.
F. For some assets, straight-line depreciation is used for both financial reporting purposes and tax purposes but the assets' lives are shorter for tax purposes.
G. Interest is received on an investment in tax-exempt municipal obligations.
H. Proceeds are received from a life insurance company because of the death of a key officer. (The company carries a policy on key officers.)
I. The tax return reports a deduction for 80% of the dividends received from U.S. corporations. The cost method is used in accounting for the related investments for financial reporting purposes.
J. Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled.
K. Expenses on stock options are accrued for financial reporting purposes.

(Terminology, Relationships, Computations, Entries)

Instructions

Complete the following statements by filling in the blanks.

In a period in which a taxable temporary difference reverses, the reversal will cause taxable income to be _____ (less than, greater than) pretax financial income.

If a $76,000 balance in Deferred Tax Asset was computed by use of a 40% rate, the underlying cumulative temporary difference amounts to $_____.

Deferred taxes _____ (are, are not) recorded to account for permanent differences.

If a taxable temporary difference originates in 2007, it will cause taxable income for 2007 to be _____ (less than, greater than) pretax financial income for 2007.

If total tax expense is $50,000 and deferred tax expense is $65,000, then the current portion of the expense computation is referred to as current tax _____ (expense, benefit) of $_____.

If a corporation's tax return shows taxable income of $100,000 for Year 2 and a tax rate of 40%, how much will appear on the December 31, Year 2, balance sheet for â??Income tax payableâ?? if the company has made estimated tax payments of $36,500 for Year 2? $_____.

An increase in the Deferred Tax Liability account on the balance sheet is recorded by a _____ (debit, credit) to the Income Tax Expense account.

An income statement that reports current tax expense of $82,000 and deferred tax benefit of $23,000 will report total income tax expense of $_____.

A valuation account is needed whenever it is judged to be _____ that a portion of a deferred tax asset _____ (will be, will not be) realized.
If the tax return shows total taxes due for the period of $75,000 but the income statement shows total income tax expense of $55,000, the difference of $20,000 is referred to as deferred tax _____ (expense, benefit).

(Carryback and Carryforward of NOL, No Valuation Account, No Temporary Differences) The pretax financial income (or loss) figures for Jenny Spangler Company are as follows.

2002 $160,000
2003 250,000
2004 80,000
2005 (160,000)
2006 (380,000)
2007 120,000
2008 100,000

Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a 45% tax rate for 2002 and 2003 and a 40% tax rate for the remaining years.

Instructions

Prepare the journal entries for the years 2004 to 2008 to record income tax expense and the effects of the net operating loss carrybacks and carryforwards assuming Jenny Spangler Company uses the carryback provision. All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.)

Solution Preview

Bandung Corporation began 2007 with a $92,000 balance in the Deferred Tax Liability account. At the end of 2007, the related cumulative temporary difference amounts to $350,000, and it will reverse evenly over the next 2 years. Pretax accounting income for 2007 is $525,000, the tax rate for all years is 40%, and taxable income for 2007 is $405,000.

Instructions

1. Compute income taxes payable for 2007.
2. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2007.
3. Prepare the income tax expense section of the income statement for 2007 beginning with the line â??Income before income taxes.â??

(Identify Temporary or Permanent Differences) Listed below are items that are commonly accounted for differently for financial reporting purposes than they are for tax purposes.

Instructions

For each item below, indicate whether it involves:

1. A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
2. A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
3. A permanent difference.
Use the appropriate number to indicate your answer for each.
A. The MACRS depreciation system is used for tax ...

Solution Summary

Bandung Corporation began 2007 with a $92,000 balance in the Deferred Tax Liability account. At the end of 2007, the related cumulative temporary difference amounts to $350,000, and it will reverse evenly over the next 2 years. Pretax accounting income for 2007 is $525,000, the tax rate for all years is 40%, and taxable income for 2007 is $405,000.

Instructions

1. Compute income taxes payable for 2007.
2. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2007.
3. Prepare the income tax expense section of the income statement for 2007 beginning with the line â??Income before income taxes.â??

(Identify Temporary or Permanent Differences) Listed below are items that are commonly accounted for differently for financial reporting purposes than they are for tax purposes.

Instructions

For each item below, indicate whether it involves:

1. A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
2. A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
3. A permanent difference.
Use the appropriate number to indicate your answer for each.
A. The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes for some plant assets.
B. A landlord collects some rents in advance. Rents received are taxable in the period when they are received
C. Expenses are incurred in obtaining tax-exempt income.
D. Costs of guarantees and warranties are estimated and accrued for financial reporting purposes.
E. Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes.
F. For some assets, straight-line depreciation is used for both financial reporting purposes and tax purposes but the assets' lives are shorter for tax purposes.
G. Interest is received on an investment in tax-exempt municipal obligations.
H. Proceeds are received from a life insurance company because of the death of a key officer. (The company carries a policy on key officers.)
I. The tax return reports a deduction for 80% of the dividends received from U.S. corporations. The cost method is used in accounting for the related investments for financial reporting purposes.
J. Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled.
K. Expenses on stock options are accrued for financial reporting purposes.

(Terminology, Relationships, Computations, Entries)

Instructions

Complete the following statements by filling in the blanks.

In a period in which a taxable temporary difference reverses, the reversal will cause taxable income to be _____ (less than, greater than) pretax financial income.

If a $76,000 balance in Deferred Tax Asset was computed by use of a 40% rate, the underlying cumulative temporary difference amounts to $_____.

Deferred taxes _____ (are, are not) recorded to account for permanent differences.

If a taxable temporary difference originates in 2007, it will cause taxable income for 2007 to be _____ (less than, greater than) pretax financial income for 2007.

If total tax expense is $50,000 and deferred tax expense is $65,000, then the current portion of the expense computation is referred to as current tax _____ (expense, benefit) of $_____.

If a corporation's tax return shows taxable income of $100,000 for Year 2 and a tax rate of 40%, how much will appear on the December 31, Year 2, balance sheet for â??Income tax payableâ?? if the company has made estimated tax payments of $36,500 for Year 2? $_____.

An increase in the Deferred Tax Liability account on the balance sheet is recorded by a _____ (debit, credit) to the Income Tax Expense account.

An income statement that reports current tax expense of $82,000 and deferred tax benefit of $23,000 will report total income tax expense of $_____.

A valuation account is needed whenever it is judged to be _____ that a portion of a deferred tax asset _____ (will be, will not be) realized.
If the tax return shows total taxes due for the period of $75,000 but the income statement shows total income tax expense of $55,000, the difference of $20,000 is referred to as deferred tax _____ (expense, benefit).

(Carryback and Carryforward of NOL, No Valuation Account, No Temporary Differences) The pretax financial income (or loss) figures for Jenny Spangler Company are as follows.

2002 $160,000
2003 250,000
2004 80,000
2005 (160,000)
2006 (380,000)
2007 120,000
2008 100,000

Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a 45% tax rate for 2002 and 2003 and a 40% tax rate for the remaining years.

Instructions

Prepare the journal entries for the years 2004 to 2008 to record income tax expense and the effects of the net operating loss carrybacks and carryforwards assuming Jenny Spangler Company uses the carryback provision. All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.)

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