Part A
Colorado Company has provided you the following information.
Year
2014
2015
2016
2017 Taxable income
$390,000
$320,000
$400,000
($1,200,000) Income tax rate
35%
37%
40%
40% Colorado Company has decided to use the loss carryback and carryforward provision as a
result of the year 2017 loss. The enacted tax rate remains at 40% after year 2017.
Colorado Company has determined that a valuation allowance is not necessary.
Prepare the journal entry on December 31, 2017 to record the carryback and carryforward
decision. YEAR 2017 Transaction Net of Loss NOL 2016 Net of Loss Unused
carryforward
Enacted future tax
rate
Deferred tax
JE TAX
RAT
E TAX
PAID TAX
REFUN
D 320000 40% 12800
0 128000 120000
0 32000
0
88000
0 2015 TAXABL
E
INCOME 40000
0
48000
0
48000
0 -320000
0 40% 400000 40% 160000
Income tax -400000
0 0
16000
0 288000 refund
40% 40%
19200
0
Dr Cr 12/31/2017 Income tax refund receivable 288,000 Income tax expense(carryback benefit) 288,000 12/31/2017 Deferred tax asset 192,000 Income tax expense(carryforward
benefit) 192,000 Part B
The Matrix Company began operations as of the beginning of 2015. During 2015, Matrix
reported GAAP (book) income before taxes of $789,500. For income tax purposes,
depreciation expense was $150,000; for GAAP (book) purposes, depreciation expense
was $74,000. Matrix accrued $900,000 of revenue for GAAP (book) purposes during
2015; $600,000 of the accrued revenue was taxable during 2015. Matrix earned interest
of $79,800 from a municipal bond investment during 2015. Matrix’s marginal income tax
rate is 40%. Matrix did not make any income tax payments during 2015.
a. Determine Matrix’s taxable income for the year ended December 31, 2015.
BOOK(GAA
P)
TAX
900,000 Revenue
Less:
Depreciation 74,000
826,000
40% DIFFERENC
E
600,000
300,000 Interest 150,000
450,000
40%
180,000
79,800 Taxable Income 259,800 Tax Rate -76,000
376,000
40%
150,400 b. Prepare the 2015 year-end journal entry to record income tax expense.
Proof: 259800+150400=410,200
JE
12/31/201
Income tax provision
5 Deferred tax
liability
Income tax payable Dr Cr 410,20
0
150,40
0
259,80
0 Part C
For each of the items below, determine whether the items are temporary differences or
permanent differences. Also, for each temporary difference, you are required to determine
whether a deferred tax asset or deferred tax liability is created by the temporary
difference described. Assume that each of the temporary differences described is an
originating difference.
1. Municipal bond interest-Permanent
2. Accrued warranty expense-Temp, def tax asset
3. Sales revenues received in advance- temp,def tax asset
4. Prepaid insurance where the tax deduction in future years will be less than the
book expense Temp, def tax liability
5. Tax depreciation expense exceeds GAAP (book) depreciation expense-Temp,
def tax liability
6. Accrued bad debt expense-temp,def tax asset
7. The dividends received deduction-perm
8. Installment sales revenue (recognized currently for GAAP, recognized for tax
purposes when cash is collected in future years)-Temp, def tax liability
9. Life insurance payments for executives for which the company is the
beneficiary-Perm
10. Fines paid for law violations-Perm
a. Explain why temporary differences result in deferred tax assets or deferred tax
liabilities while permanent differences do not, and describe the difference in the
formation of deferred tax assets and deferred tax liabilities.
Answer:
Temporary differences arise when the tax basis of an asset or liability and its reported
amount in the financial statements differ. This difference will reverse and result in taxable
or deductible amounts in future years as the asset is recovered or the liability is settled at
its reported amount. Permanent differences are items that (a) enter into financial income
but never into taxable income or (b) enter into taxable income but never into financial
income. These items are not included in the computation of taxable income, and the
profession has concluded that the tax consequences of these differences should not be
recognized. The existence of any deferred tax asset or liability is a result of temporary differences between taxes paid for the period and taxes payable for
the period. The bigger that difference becomes, the bigger the deferred tax asset
or liability on the balance sheet would be.
Recording of deferred tax asset (liability) should only be made if these
differences are expected to reverse in the future. If it is doubtful that future
economic benefits will be realized from a temporary difference, the temporary
difference will not lead to the creation of a deferred tax asset or liability.
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