Chapter 16 home work intermediate 11
Question 1 chapter 16 Times-Roman Publishing Company reports the following amounts in
its first three years of operation:
($ in 000s)
Pretax
accounting
income
Taxable income 2016 2017 2018
$ 38
$360 $350
0
43
370 390
0 The difference between pretax accounting income and taxable
income is due to subscription revenue for one-year magazine
subscriptions being reported for tax purposes in the year received, but
reported in the income statement in later years when earned. The
income tax rate is 40% each year. Times-Roman anticipates profitable
operations in the future.
Required:
1.What is the balance sheet account for which a temporary difference
is created by this situation?
Unearned subscription
Earned subscription 2.For each year, indicate the cumulative amount of the temporary
difference at year-end. (Enter your answers in thousands.)
December
2016
2017
2018 Temporary difference:
3.
3. Determine the balance in the related deferred tax account at the
end of each year. Is it a deferred tax asset or a deferred tax
liability? (Enter your answers in thousands.)
December
2016
2017
2018
4. How should the deferred tax amount be classified and reported in the
balance sheet?
Current
Noncurrent Question 2 You are the new accounting manager at the Barry Transport Company. Your CFO has asked you
to provide input on the company's income tax position based on the following:
1 Pretax accounting income was $42 million and taxable income was $8 million for the year ended December
. 31, 2016.
2
The difference was due to three items:
.
a. Tax depreciation exceeds book depreciation by $30 million in 2016 for the business complex acquired that
year. This amount is scheduled to be $50 million in 2017 and to reverse as ($40 million) and ($40 million) in
2018, and 2019, respectively.
b. Insurance of $10 million was paid in 2016 for 2017 coverage.
c. A $6 million loss contingency was accrued in 2016, to be paid in 2018.
3
No temporary differences existed at the beginning of 2016.
.
4
The tax rate is 40%.
. Required:
1.Determine the amounts necessary to record income taxes for 2016 and prepare the appropriate journal entry. (If no entr
transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rou
5,500,000 should be entered as 5.5).)
2.How should the deferred tax amounts be classified in a classified balance sheet? (Enter your answers in
millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)
3.Assume the enacted federal income tax law specifies that the tax rate will change from 40% to 35% in 2018.
When scheduling the reversal of the depreciation difference, you were uncertain as to how to deal with the fact
that the difference will continue to originate in 2017 before reversing the next two years. Upon consulting
PricewaterhouseCoopers' Comperio database, you found:
.441 Depreciable and amortizable assets
Only the reversals of the temporary difference at the balance sheet date would be scheduled. Future
originations are not considered in determining the reversal pattern of temporary differences for depreciable
assets. FAS 109 [FASB ASC 740–Income Taxes] is silent as to how the balance sheet date temporary
differences are deemed to reverse, but the FIFO pattern is intended.
You interpret that to mean that, when future taxable amounts are being scheduled, and a portion of a
temporary difference has yet to originate, only the reversals of the temporary difference at the balance sheet
date can be scheduled and multiplied by the tax rate that will be in effect when the difference reverses. Future
originations (like the depreciation difference the second year) are not considered when determining the timing
of the reversal. For the existing temporary difference, it is assumed that the difference will reverse the first year
the difference begins reversing.
Determine the amounts necessary to record income taxes for 2016 and prepare the appropriate journal
entry. (If no entry is required for a transaction/event, select "No journal entry required" in the first
account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be
entered as 5.5).) Record 2016 income taxes
Question 3
Fores Construction Company reported a pretax operating loss of $220 million for financial reporting purposes
in 2016. Contributing to the loss were (a) a penalty of $15 million assessed by the Environmental Protection
Agency for violation of a federal law and paid in 2016 and (b) an estimated loss of 20 million from accruing a loss contingency. The loss will be tax deductible when paid in 2017.
The enacted tax rate is 40%. There were no temporary differences at the beginning of the year and none
originating in 2016 other than those described above. Taxable income in Fores’s two previous years of
operation was as follows: 201
4
201
5 $115 million
60 million Required:
1. Prepare the journal entry to recognize the income tax benefit of the net operating loss in 2016. Fores elects
the carryback option. (If no entry is required for a transaction/event, select "No journal entry
required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered
as 10).) Record 2016 income taxes. 2.What is the net operating loss reported in 2016 income statement? (Enter your answers in millions (i.e.,
10,000,000 should be entered as 10).) Net operating loss -------------- millions 3. Prepare the journal entry to record income taxes in 2017 assuming pretax accounting income is $95 million.
No additional temporary differences originate in 2017. (If no entry is required for a transaction/event,
select "No journal entry required" in the first account field. Enter your answers in millions (i.e.,
10,000,000 should be entered as 10).) Income taxes 2017.
QUESTION 4
Fores Construction Company reported a pretax operating loss of $260 million for financial reporting
purposes in 2016. Contributing to the loss were (a) a penalty of $15 million assessed by the Environmental
Protection Agency for violation of a federal law and paid in 2016 and (b) an estimated loss of 20 million from
accruing a loss contingency. The loss will be tax deductible when paid in 2017.
The enacted tax rate is 40%. There were no temporary differences at the beginning of the year and none
originating in 2016 other than those described above. Taxable income in Fores’s two previous years of
operation was as follows: 20 13 milli
$
14
5on
20
milli
80
15
on Required:
1. Prepare the journal entry to recognize the income tax benefit of the net operating loss in 2016. Fores
elects the carryback option. (If no entry is required for a transaction/event, select "No journal entry
required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be
entered as 10).) Record 2016 income taxes. 2.What is the net operating loss reported in 2016 income statement? (Enter your answers in millions
(i.e., 10,000,000 should be entered as 10).) NET OPERATING LOSS IN MILLIONS 3.Prepare the journal entry to record income taxes in 2017 assuming pretax accounting income is $120
million. No additional temporary differences originate in 2017. (If no entry is required for a
transaction/event, select "No journal entry required" in the first account field. Enter your
answers in millions (i.e., 10,000,000 should be entered as 10).) Record 2017 income taxes. QUESTION 5 West Corp. leased a building and received the $36,000 annual rental payment on June
15, 2016. The beginning of the lease was July 1, 2016. Rental income is taxable when
received. West’s tax rates are 30% for 2016 and 40% thereafter. West had no other
permanent or temporary differences. West determined that no valuation allowance was
needed. What amount of deferred tax asset should West report in its December 31, 2016,
balance sheet? QUESTION 6 In its December 31, 2016, balance sheet, Shin Co. had income taxes payable of $13,000 and
a current deferred tax asset of $20,000 before determining the need for a valuation account. Shin had
reported a current deferred tax asset of $15,000 at December 31, 2015. No estimated tax payments were
made during 2016. At December 31, 2016, Shin determined that it was more likely than not that 10% of the
deferred tax asset would not be realized. In its 2016 income statement, what amount should Shin report as
total income tax expense?

 

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