E19-3 (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
of 2007, the related cumulative temporary difference amounts to $350,000, and it will reverse evenly
the next 2 years. Pretax accounting income for 2007 is $525,000, the tax rate for all years is 40%, and
income for 2007 is $405,000.
Instructions
(a) Compute income taxes payable for 2007.

162000

(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes
payable for 2007.
Income Tax Expense ###
Income Tax Payable ###
Deferred Income Taxes ###
(c) Prepare the income tax expense section of the income statement for 2007 beginning with the line
“Income before income taxes.”
Income before income taxes 525000
Income tax expense
Current 162000
Deferred 48000 210000
Net income 315000

E19-6 (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) ___2___ The MACRS depreciation system is used for tax purposes, and the straight-line depreciatio
method is used for financial reporting purposes for some plant assets.
(b) ____1__ A landlord collects some rents in advance. Rents received are taxable in the period when
they are received.
(c) ____3__ Expenses are incurred in obtaining tax-exempt income.
(d) ___1___ Costs of guarantees and warranties are estimated and accrued for financial reporting
purposes.
(e) ___2___ Installment sales of investments are accounted for by the accrual method for financial
reporting purposes and the installment method for tax purposes.
(f) ____1__ 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) ___3___ Interest is received on an investment in tax-exempt municipal obligations.
(h) ___3___ 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) ___2___ The tax return reports a deduction for 80% of the dividends received from U.S. corporation
The cost method is used in accounting for the related investments for financial
reporting purposes.
(j) ___1___ 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) ___2___ Expenses on stock options are accrued for financial reporting purposes.
eginning Deferred Taxes)
d Tax Liability account. At the end
00, and it will reverse evenly over
x rate for all years is 40%, and taxable

ome taxes, and income taxes

2007 beginning with the line

ems that are commonly

or tax purposes.

nd, therefore, will usually

therefore, will usually give

d the straight-line depreciation

taxable in the period when

d for financial reporting

rual method for financial

ancial reporting purposes

l obligations.
e of the death of a key officer.
ceived from U.S. corporations.

for books. These losses are

purposes.
E19-7

Instructions
Complete the following statements by filling in the blanks.

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

(b) If a $76,000 balance in Deferred Tax Asset was computed by use of a 40% rate, the underlying
cumulative temporary difference amounts to _______. 190000

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

(d) 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.

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

(f) 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 “Income tax payable” if the
company has made estimated tax payments of $36,500 for Year 2? $________.

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

(h) An income statement that reports current tax expense of $82,000 and deferred tax benefit of $23
will report total income tax expense of $________. 59000

(i) 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.

(j) 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).

E 19-9

Carryback and Carryforward

(Carryback and Carryforward of NOL, No Valuation Account, No Temporary Differences)

The pretax financial income (or loss) figure for Jenny Sprangler 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 of 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.)
Income Tax Refund Receivable 72,000
Benefit Due to Loss Carryback-income tax exp 72,000

Income Tax Refund Receivable 32,000

Benefit Due to Loss Carryback-income tax exp 32,000

Deferred Tax Asset (start carry-forward) 120,000

Benefit Due to Loss Carryforward (Income Tax Expense)
120,000

Income Tax Expense 48,000

Deferred Tax Asset 48,000

Income Tax Expense 40000

Deferred Tax Asset 40000
 cause taxable income

te, the underlying

me for 2007 to be

current portion of the

15,000

a tax rate of 40%,

x payable” if the
3500

rded by a _______

ed tax benefit of $23,000

n of a deferred

e statement shows
deferred tax _______