Week 4 - Class Handout (SU 8-Intang, SU9-Pay and Taxes) to present(1)

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Feb 20, 2024

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CPA Review – FAR – Week 4 Handouts Spring 2024 (SU 8 – Intangibles and 9-Payables & Taxes) SU 9.1 Intangible Assets Distinct from Goodwill and 9.2 Accounting subsequent to Acquisition Externally acquired (other than goodwill) Recognized at Acquisition costs plus incidentals such as legal fees Internally developed (other than goodwill) CUSTOMER LIST Normally just incidental costs (most ends up getting expensed) 1.Wind Co. incurred organization costs of $6,000 at the beginning of its first year of operations. How should Wind treat the organization costs in its financial statements in accordance with GAAP? A. Never amortized. B. Amortized over 180 months. C. Amortized over 40 years. D. Expensed immediately. 2.Northern Airline purchased airline gate rights at Newark International Airport for $ 2,000,000 with a legal life of five years. However, Northern intends and has the ability and right to extend the rights every ten years for an indefinite period of time. Over what period of time should Northern amortize the gate rights? A. 5 years. B. 15 years. C. The rights should not be amortized. D. 40 years. 3.West Co. paid $ 50,000 for an intangible asset other than goodwill. Fair value of the asset is $55,000. West signed a contract to sell the asset for $10,000 in 10 years. What amount of amortization expense should West record each year? A. $4,000 B. $5,000 C. $4,500 D. $5,500 8.3 Patent Capitalization Amortization period Purchased or developed internally Initial - FV of consideration + incidental costs Shorter of (1) useful life or (2) legal life remaining after acquisition or application filed Internally developed most likely not capitalized (only capitalize registration and legal fees) Legal defense – if successful capitalize (over shorter or remaining legal life or estimated useful life) Unsuccessful – expense and impairment of the patent Sold or temporarily licensed to 3 rd party If sold – Recognize all revenue at point license is granted 8.4 Franchise – permits purchases to operate certain business Franchisee Accounting  JOE WHO AM I??? Franchisor Accounting  SUBWAY CORPORATE Exclusive right to sell a specificized product/service in a given geographical area and to use TM, patents, Trade secrets… SUBWAY Capitalize costs of acquiring the franchise (if paid over > 1year, use PV of payments) Revenue from a license of the right to access IP is recognized over the license period (or life if shorter). Amortize over useful estimated life; *if based on % of revenue/services then expense as incurred Initial fixed fees recognized over entire franchise license period *Revenue from sale-based royalties when sales occur 1 3.customer list 50,000.00 paid 55,000.00 FV 10,000.00 RV 40,000.00 4,000.00

8.5 Cloud Computing Arrangements (CCA) What is it? Hosting arrangement in which end user does not take possession of the software – it resides on a remote vendor’s hardware. Includes SaaS. Use the software online by logging on as needed. TURBOtAX Key: Determine if the CCA includes a software license in addition to the service or if it is only a service. Does it qualify as including a software license? Customer can take possession of the software at any time AND Customer can run the software without the vendor  DOWNLOAD **during the ice storm – can you still play w/out internet? Why does this matter? REvENUE 606  If it INCLUDES a software license, capitalize and amortize S/L basis If it has multiple elements (SWA license, hosting), allocate to each element. If NO software license, then account for as a regular service contract and expense as incurred. 4.Simulation: Presented below is selected account information related to Fryman Inc. at year-end. All these accounts have debit balances. Identify which items should be classified as an intangible asset . For those items not classified as intangible assets, indicate where each would be reported in the financial statements: Identify as Intangible Assets, Current Assets, Non-current Assets, Investments, Operating expenses Brand Names Intangible Accounts Receivable CA Film Contract rights Intangible PPE NCA Research & Development costs Oper Exp Land NCA Covenants not to complete Intangible Music Copy rights Intangible Cash CA Customer lists Intangible Notes Receivable NCA Prepaid Expenses CA Cable television franchise Intangible Organization costs Oper Exp Monthly fee for software access Oper Exp Internet domain name Intangible 5.Ely Co. bought a patent from Baden Corp. on January 1, 2018, for $900,000. An independent consultant retained by Ely estimated that the remaining useful life at January 1, 2018 is 15 years. Its unamortized cost on Baden’s accounting records was $450,000; the patent had been amortized for 5 years by Baden. How much should be amortized for the year ended December 31, 2018 by Ely Co.? a. $0. b. $45,000. c. $60,000. d. $90,000. 8.2 Intangible Assets Distinct from Goodwill – Accounting Subsequent to Acquisition Finite Useful life – Recoverability test Indefinite useful life- @ least annually 1. Events or changes in circumstances indicate a possible loss Optional – Qualitative assessment (more likely than not) 2. Carrying amount > Sum of undiscounted cash flows 1. Review for impairment 3. Loss = Carrying amount – Fair value 2. Loss = Carrying amount – Fair value Previously recognized impairment loss cannot be reversed Impairment loss is recognized income from continuing operations 2 5.00 purchase 900,000.00 life 15.00 60,000.00

6.The following information is available for Barkley Company’s patents: Cost $3,440,000 Carrying amount 1,920,000 Expected future net cash flows 1,600,000 Fair value 1,300,000 Barkley would record a loss on impairment of A. $ 320,000 B. $ 620,000 C. $1,920,000 D. $1,840,000 SU 9.1 Accounts Payable Definition of a liability Present obligation to transfer assets or provide services, ………that is unavoidable and …………….is the result of a past transaction or event. Type Current Long-term/ Non-current Definition Due in the coming year/operating cycle AND will be met by transfer of a current asset or the creation of another current liability Worst definition possible – defined by what it is not – not a current liability Time to resolve One operating cycle/ current year More than one year How record Amount due, nominal amount, face value PV of all future payments (P + i ) 7.Which of the following is generally associated with payables classified as accounts payable? Periodic Payment Secured of Interest by Collateral a. No No b. No Yes c. Yes No d. Yes Yes 9.2 Accrued Expenses 3 P present obligation U unavoidable R result of past

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3 Types of Journal Entries  Why do we need these? 1.Some events are not recorded daily as its not efficient to do so. 2.Some costs are not recorded during the period because these costs expire with the passage of time (vs. a recurring daily transaction). 3.Some items may be unrecorded but should be. [accrued revenue, accrued expenses] Accrual Entries Reversing Entries No Reversing Entries Incurred, but not yet paid We don’t have the invoice yet, but we have received the benefit (utilities) This happens the NEXT period after the Accrual <acc> *company may choose to use these to simplify the JE for the next period If we did not reverse, how does it look when we actual pay it? Dr. Utilities expense Cr. Accrued utilities Period 1  Dr. Utilities expense 10 Cr. Accrued utilities Period 2  Dr. Accrued utilities Cr. Utilities expense 10 Record invoice Dr. Utilities expense 11 Cr. A/P 11 Period 1  Dr. Utilities expense 10 Cr. Accrued utilities Period 2  dr. Accrued utilities 10 Dr. Utilities exp 1 Cr. AP 11 8.Which of the following adjusting journal entries made on December 31, 2020, are eligible for reversing entries to be made on January 1, 2021? 1.Debit Interest Expense and credit Interest Payable 2.Debit Lease Expense and credit Prepaid Lease 3.Debit Depreciation Expense and credit Accumulated Depreciation – Equipment 4 .Debit Prepaid Advertising and credit Advertising Expense 5.Debit Deferred Service Revenue and credit Service Revenue A)Entries 1, 2, 4, and 5 are eligible. B)All five of the entries are eligible. C)Entries 1, 4, and 5 are eligible. D)Entries 1 and 4 are eligible. E)Only entry 1 is eligible. 9.At the beginning of 2019, Pixel Film Corp. had a balance of $ 23,000 in its Deferred Demolition Revenue account. During 2019, Pixel Film Corp. received additional cash prepayments totaling $ 156,800 by customers for demolition jobs to be completed later . The cash prepayments were correctly accounted for with an increase in Deferred Demolition Revenue. As of the company’s year end of December 31, 2019, Pixel had completed $143,500 of the prepaid contracts. Pixel should record the following journal entry on December 31, 2019: A)12/31 Deferred Demolition Revenue 143,500 Demolition Revenue 143,500 B)12/31 Deferred Demolition Revenue 36,300 Demolition Revenue 36,300 C)12/31 Demolition Revenue 36,300 Deferred Demolition Revenue 36,300 *reversing weird D)12/31 Demolition Revenue 23,000 Cash 120,500  cash in Deferred Demolition Revenue 143,500 E)12/31 Deferred Demolition Revenue 143,500 Accounts Receivable 23,000 Error correction? 4

Demolition Revenue 120,500 10. (Based on Cam2-54) The post-closing trial balance for a retailer as of December 31, Year 1: Acc. No. Description Debit Credit 101 Cash $ 27,000 - 102 Accounts receivable 21,000 - 103 Allowance for doubtful accounts $ 1,000 104 Inventory 35,000 - 105 Prepaid insurance 900 - 200 Equipment 50,000 - 201 Accumulated depreciation—equipment - 22,500 300 Accounts payable - 7,500 301 Salaries payable - $- 302 Income taxes payable - 4,000 400 Common stock - 80,000 401 Retained earnings - 18,900 500 Sales - - 600 Cost of goods sold - - 601 Operating expense - - 602 Income tax expense - - 700 Income summary - - Totals $133,900 $133,900 The following transactions occurred during Year 2 in the order shown: 1.Sales revenue was $30,000, of which $10,000 was on credit; the cost of goods sold, using perpetual inventory, was $19,500. 2. Collected $17,000 cash on accounts receivable. 3. Paid $4,000 cash toward income taxes payable (for Year 1). 4. Purchased $40,000 of merchandise, of which $8,000 was on credit. 5. Paid $6,000 cash toward accounts payable. 6. Sales revenue was $72,000 (in cash); cost of goods sold was $46,800. 7. Paid $19,000 cash in operating expenses. 8. On July 1, Year 2, issued 1,000 shares of common stock, par $1, for $1,000 cash. 9. Purchased $100,000 of merchandise, of which $27,000 was on credit. 10. Sales revenue was $98,000, of which $30,000 was on credit; cost of goods sold, $63,700. 11. Collected $26,000 cash toward accounts receivable. 12. Paid $28,000 cash toward accounts payable. 13. Paid $18,000 cash for various operating expenses. 5

a. Prepare general journal entries for each of the transactions for Year 2. 1 Cash 20,000 7 Oper expenses 19,000 AR 10,000 Cash (19,000) Sales (30,000) 8 Cash 1,000 COGS 19,500 Common stock (1,000) Inventory (19,500) 9 Inventory 100,000 2 Cash 17,000 Cash (73,000) AR (17,000) AP (27,000) 3 Income Taxes payable 4,000 10 Cash 68,000 Cash (4,000) AR 30,000 4 Inventory 40,000 Sales (98,000) Cash (32,000) COGS 63,700 AP (8,000) Inventory (63,700) 5 AP 6,000 11 Cash 26,000 Cash (6,000) AR (26,000) 6 Cash 72,000 12 AP 28,000 Sales (72,000) Cash (28,000) COGS 46,800 13 Oper exp 18,000 Inventory (46,800) Cash (18,000) b.Update the trial balance Acc. No. Description Debit Credit 101 Cash 102 Accounts receivable 103 Allowance for doubtful accounts 104 Inventory 105 Prepaid insurance 200 Equipment 201 Accumulated depreciation—equipment 300 Accounts payable 301 Salaries payable 302 Income taxes payable 400 Common stock 401 Retained earnings 500 Sales 600 Cost of goods sold 601 Operating expense 602 Income tax expense 700 Income summary Totals c.Prepare the following December 31, Year 2 adjusting entries for the following information: 6

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1.Increase Allowance for Doubtful Accounts by $200 (any expense rolls to operating expenses). 2.Accrued income tax expense is $11,784. 3.Accrued salaries were $300. 4.Use straight line depreciation for the equipment. [20 year life] $50k/20yrs = 2500 5.Adjust Prepaid Insurance for current year expense. [for 20 months, paid 1.1. this year] $900*12/20 = 540 1 Operating expenses 200 4 Operating expenses 2500 Allowance for Doubtful (200) Accum depr - equip (2,500) 2 Income tax expense 11,784 5 Operating expense 540 Income tax payable (11,784) Prepaid insurance (540) 3 Salaries expense 300 Salaries payable (300) d.Prepare the Adjusted Trial Balance Acc. No. Description Debit Credit 101 Cash 102 Accounts receivable 103 Allowance for doubtful accounts 104 Inventory 105 Prepaid insurance 200 Equipment 201 Accumulated depreciation—equipment 300 Accounts payable 301 Salaries payable 302 Income taxes payable 400 Common stock 401 Retained earnings 500 Sales 600 Cost of goods sold 601 Operating expense 602 Income tax expense 700 Income summary Totals e.Prepare the closing entries. Close all the I/s out to Retained Earnins 1 Sales 200,000 3 Income Summary 17,676 Income Summary (or RE) (200,000) Retained earnings 17,676 2 Income Summary (or RE) 182,324 **this is net income for year COGS (130,000) Opert exp (40,540) Income tax expn (11,784) f.Prepare the post-closing trial balance 7

Acc. No. Description Debit Credit 101 Cash 102 Accounts receivable 103 Allowance for doubtful accounts 104 Inventory 105 Prepaid insurance 200 Equipment 201 Accumulated depreciation—equipment 300 Accounts payable 301 Salaries payable 302 Income taxes payable 400 Common stock 401 Retained earnings Totals Compensated Absences – make sure you know what is and isn’t an EXPENSE to the employer Compensated Absences (Vacation, Sick, Paid Time Off) should be accrued IF ALL of the following conditions are met: 1. The employer’s obligation relating to the employees’ rights to receive compensation for future absences is attributable to employees’ services __already__ _____perfromed/rendered________. 2. The obligation relates to the rights at __vesting__ or __accumulate____ *unlimited PTO does not apply. 3. Payment of the compensation is __probable_________. 4. The amount can be reasonable ______estimated_________. 11.Inc provides paid vacations to its employees. At December 31, 2022, 30 employees have each earned 2 weeks of vacation time. The employees’ average salary is $500 per week and Kasten accrues the accumulated vacation pay on December 31, 2022. In January 2023 all employees received a 5% pay raise, and the 30 employees with vacation all take their families on a two week trip in March . Record the journal entry for the accrual and then the payment of vacation wages. ____ _earned_______ ___Dec 31, 2022_________Jan 2023 _____________________March 2023____ December 2022 (accrual) March 2023 (payment) 30 ee * $500 week * 2 weeks = $30,000 Accrued vacay 30,000 Salary expense 30,000 Salary expense 1,500 Accrued vacay 30,000 Cash (30 ee * 2 wks * (500*1.05)) 31,500 I/S impact of this in 2022? $ __ 30,000 exp ___ I/S impact in 2023? $ __ 1,500 exp  change in estimate 8

12.Ebbert Company’s salaried employees are paid biweekly. Occasionally, advances made to employees are paid back by payroll deductions . Information relating to salaries for the calendar year 2021 is as follows: 12/31/20 12/31/21 Employee advances $24,000 $36,000  adjust AR Accrued salaries payable 160,000 ? Salaries expense during the year 1,400,000 Salaries paid during the year (gross) 1,250,000 At December 31, 2021, what amount should Ebbert report for accrued salaries payable ? what is the ending B/S amount a. $310,000. b. $182,000. c. $134,000. d. $170,000. 9.3 Certain Taxes Payable 13.Roasten Corp.'s payroll for the pay period ended October 31, 2021 is summarized as follows: Amount of Wages Subject to Payroll Taxes Department Payroll Total Wages Fed Income Tax Withheld F.I.C.A. Unemployment Factory $75,000 $9,000 $70,000 $32,000 Sales 22,000 3,000 16,000 2,000 Office 18,000 2,000 8,000 — $115,000 $14,000 $94,000 < limit > $34,000 Assume the following payroll tax rates: F.I.C.A. for employer and employee 8% each Unemployment 3% What amount should Roasten accrue as its share of payroll taxes in its October 31, 2021 balance sheet? a. $22,540. b. $15,020. c. $10,220. d. $8,540. 9 FICA @ limit 94,000 * 8% = 7,520 Unempol @ limit $ 34,000 @ 3% =1,020 Total combination of the two 8540 Accrued Salaries Payable B/S @ boy 160,000 CY sal exp 1,400,000 1,250,000  cy cash pd @ EOY 21 310,000

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SU 9.5 Income Tax Accounting - Overview The objective of accounting for income taxes is to recognize  Amount of taxes currently payable or refundable  Deferred tax liabilities and assets for future tax consequences of event that have already been recognized in either the financial statements or tax returns Why do we need to worry about this? Because GAAP and the IRS have different goals! Goal of GAAP – matching/accrual Goal of the IRS – raise money for US & encourage/discourage behavior Uses asset/liability approach Focus is on cash Tax Terms (IRS makes the rules) GAAP Terms (FASB calls the shots) Taxable income – Income before income tax for tax purposes Pretax accounting income – income before income tax for FINANCIAL accounting purposes Deductible items - cause income tax to decrease Deferred tax asset – recognized tax effect of future deductible temporary differences – will cause future taxable income to decrease relative to pretax accounting income ☹ Valuation allowance – portion of DTA which is “more likely than not” that a tax benefit will be realized Taxable items – cause income tax to increase Deferred tax liability– recognized tax effect of future taxable temporary differences – will cause future taxable income to increase relative to pretax accounting income 😊 Income tax liability – amount of income tax the firm must pay on taxable income for the year $$$ out the door  we can make estimated prepayments Income tax expense (benefit) – amount reported in the income statement that measures the income tax cost for the years transactions Current income tax provision - > ITLiability + Deferred income tax provision  CHANGE = Income tax expense (benefit) 9.7 Enacted tax rate – the rate that has been made into law and must be used (cannot use expected, anticipated, hoped, planned, dream…) Use the enacted tax rate for when the liability or asset is expected to settle Current income tax provision (current portion) – amount of income taxes payable (refundable) for the year = income tax liability for the year Deferred income tax provision – amount of income tax expense for the year that is not currently due – the net sum of the changes in the deferred tax accounts Int Erperiod Tax allocation – process of measuring and recognizing the total income tax consequences of transaction in the year – only temporary differences and NOLs give rise to DTAs and DTLs. Must be measured at the FUTURE ENACTED tax rates. Intr Aperiod Tax allocation – allocating tax expense to continuing operations, discontinued operations, OCI and items directly impacting equity 10

SU 9.6 Temporary and Permanent Differences 14. IRS/Tax GAAP Scenario $10,000 equipment purchase (5 year useful life, no salvage) in 2022 Tax rate is 25% Treatment Company elects a 100% tax deduction in the first year Company elects straight-line depreciation for financial reporting Rev/Expense Impact in 2022 Depr exp full $10,000 Depr exp $10k/ 5 yr = $2,000 Balance at end of year Tax 10k cost – 10k depr = $0 basis Net book 10k -2k = $8k Value Taxable temporary difference Taxable temporary difference Assume Income 20,000 GAAP *dep diff – take out the GAAP 2,000 Add in the tax (10,000) Taxable income 12,000 Tax rate is 25% = 3,000 Deferred tax _ liability ____ Cumulative difference = 2k-10k= 8,000 ******always tax effect the difference ******* 8k * 25% = DTL 2,000  originating ITE (income tax exp) 5,000  plug DTA ---- DTL 2,000 ITP (income tax pay) 3,000 15. IRS/Tax GAAP Scenario Company pays insurance premium of $15,000 on 12/31/22 for casualty insurance coverage for the following year (2023) Tax rate is 25% Treatment Tax deductible expense in ___ 2022  the year the cash outflows ___ JE at 12/31/22 Dr. Prepaid ins 15,000 Cr. Cash 15,000 Rev/Expense Impact in 2022 Exp of $15,000 Exp of $0 Balance at end of year 2022 Tax $0 Basis Net book $15,000 * 25% =3,750 Value Taxable temporary difference Taxable temporary difference Assume GAAP Income 20,000 Remove GAAP 0 Add the tax (15,000) Taxable income 5,000 * 25% = 1,250 Deferred tax _ liability 😊 ___ ITE 5,000 DTA -- DTL 3,750 ITP 1,250 11 Deferreds  must reverse in the future  TEMPORARY Permenant differences  do NOT throw DTA/DTL, will never reverse DTL  future taxable, I’m gonna have to pay in the future, like a payable 😊 DTA  able to deduct in the future, so I’ve already Paid it – it’s like I prepaid it ☹

16. IRS/Tax GAAP Scenario Company has tax revenue of $5,000 for cash received from a customer in 2022 before the company satisfies a performance obligation in 2023 Tax rate is 25% Treatment Tax deductible expense in taxable income ___________ JE at 12/31/22 Dr. Cash 5,000 Cr. Deferred Revenue (liab) 5,000 Rev/Expense Impact in 2022 Revenue $5,000 (cash) $0 revenue Balance at end of year 2022 Tax $0 basis Net book $5,000 liability * 25% = 1250 Value Taxable temporary difference Taxable temporary difference Assume GAAP Fin Income 20,000 Remove GAAP 0 Add the tax 5,000 Taxable income 25,000*25% = 6,250 Deferred tax ___ asset ☹ ___ ITE 5,000 DTA 1,250 DTL --- ITP 6250 Temporary differences – Reverse over time Originating – the item causing the temporary difference first occurs  Identify as DTA vs. DTL General Tax Accrual Entry Dr. Income Tax Expense (plug) Dr. DTA Cr. DTL Cr. Income Tax Payable (TI * Current Rate*) Reversing – later years, the difference attributed to the item *Always use the enacted tax rate for Income Tax Payable! For DTA/DTL use the future enacted tax rates. Valuation Allowance – a DTA like any other asset, is an asset – must have future economic benefit. [ie Allow Bad Debt] If there is not sufficient probability (>50% chance) of realizing the DTA, a valuation allowance (contra account) is recorded to reduce the DTA to the amount expected to be realized. Uncertain Tax Positions – we have to make estimates – is it “More likely than not” (>50%) that the position will be sustained upon an IRS audit 17.Foltz Corp.'s 2021 income statement had pretax financial income of $500,000 in its first year of operations. Foltz uses an accelerated cost recovery method on its tax return and straight-line depreciation for financial reporting. The differences between the book and tax deductions for depreciation over the five-year life of the assets acquired in 2021, and the enacted tax rates for 2021 to 2025 are as follows: Book Over (Under) Tax Tax Rates ITE ITP 100,000 DTL PtFI $500,000 Remove gaap Add tax (100,000)  diff Tax income 400,000* 25%<-- 100,000 2021 $(100,000) 25%<-- pay 2022 (130,000) 20% =(130)+(30)+120+140= 2023 (30,000) 20% 100k* 20%cumulative different 2024 120,000 20% In future 2025 140,000 20% There are no other temporary differences. In Foltz's December 31, 2021 balance sheet, the noncurrent deferred income tax liability and the income taxes currently payable should be Noncurrent Deferred Income Taxes Income Tax Liability Currently Payable a. $52,000 $80,000 b. $52,000 $100,000 c. $20,000 $80,000 12

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d. $20,000 $100,000 18.Wright Co., organized on January 2, 2021, had pretax accounting income of $960,000 and taxable income of $3,120,000 for the year ende d December 31, 2021. The only temporary difference is accrued product warranty costs which are expected to be paid as follows: 2022 $720,000 20% $144,000 2023 360,000 20% $72,000 2024 360,000 20% $72,000 2025 720,000 15% $108,000 The enacted income tax rates are 25% for 2021, 20% for 2022 through 2024, and 15% for 2025. If Wright expects taxable income in future years, the deferred tax asset in Wright's December 31, 2021 balance sheet should be a. $288,000. b. $360,000. c. $396,000. d. $540,000. 19. On its December 31, 20X5 balance sheet, Shin Co. has income tax 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 deferred tax asset of $15,000 at December 31, 20X4. No estimated tax payments are made during 20X5. At December 31, 20X5, Shin determines that it is more likely than not that 10% of the deferred tax asset would not be realized. In its 20X5 income statement , what amount should Shin report as total income tax expense? A $8,000 B $8,500 C. $10,000 D. $13,000 ITP (given ) 13,000 cr. ITE (PLUG) 10,000 DTA 5,000 DTA – Valu Allow 2,000 ITP (given) 13,000 Permanent Differences – Items recognized for either GAAP income calculation or Tax income calculation – but not BOTH. Permanent differences affect only the period in which they occur. They do not give rise to future taxable or deductible amounts. There is no deferred tax asset/liability on the balance sheet from these! The MVP LED the team to a PERMANENT victory! 1. M uni and state bond interest - Interest received from investments in state and municipal obligations ¾ The related investment expenses to obtain tax-exempt income 2. V iolations, fines, penalties - Expenses due to violations of the law (not tax deductible) 3. P ortion of dividends received from U.S. corporations that is not taxable 4. L ife insurance proceeds on death of insured executive (not taxable) key man life insurance ¾ E xpense for Premiums paid for life insurance policies when the payer is the beneficiary (not tax deductible) 6. D epletion tax deduction for depletion of natural resources (percentage depletion) that exceeds the income statement/cost depletion expense 13 Under GAAP Dr. Warranty Exp 2160,000 Cr. Warranty Liab 2,160,000 DTA $15,000 @ boy 5,000  CY activity 20,000 @ 12.31.x5 DTA-Valuation Allow No opening 0 Adj  2,000 EOY 2,000 EOY DTA = 20,000 * 10% = 2,000

20.Haag Corp.'s 2021 income statement showed pretax accounting income of $2,500,000. To compute the federal income tax liability, the following 2021 data are provided: Income from exempt municipal bonds $ 100,000 Permanent Depreciation deducted for tax purposes in excess of depreciation deducted for financial statement purposes 200,000  temp, dtl 😊 Estimated federal income tax payments made 330,000 Enacted corporate income tax rate 20% What amount of current federal income tax liability should be included in Hagg's December 31, 2021 balance sheet? a. $110,000 b. $150,000 c. $170,000 d. $440,000 21.In its 2021 income statement, Cohen Corp. reported depreciation of $3,700,000 and interest revenue on municipal obligations of $700,000 . Cohen reported depreciation of $5,500,000 on its 2021 income tax return. The difference in depreciation is the only temporary difference, and it will reverse equally over the next three years. Cohen's enacted income tax rates are 25% for 2021, 20% for 2022, and 15% for 2023 and 2024. What amount should be included in the deferred income tax liability in Hertz's December 31, 2021 balance sheet? DTL does not include muni a. $300,000 b. $450,000 c. $500,000 d. $625,000 9.7 Income Tax Accounting – Applicable Tax Rate 22.Ferguson Company has the following cumulative taxable temporary differences: 12/31/22 12/31/21 $3,600,000 $2,560,000 The tax rate enacted for 2022 is 30%, while the tax rate enacted for future years is 20%. Taxable income for 2022 is $6,400,000 and there are no permanent differences. Ferguson's pretax financial income for 2022 is a. $10,000,000. b. $7,440,000. c. $5,360,000. d. $2,800,000. 14 PTFI $2,500,000 ITP 440,000 Est payments ( 330,000) 110,000 what we have left to pay PERM – Muni bonds ( $ 100,000) Remove Gaap (200,000) Add the tax Taxable income 2,200,000* 20% = 440,000 2021 - 25% 2022 , 20% 2023&2024 15% Tax depr 5,500,000 GAAP depr $3,700,000 600k* 20%= 120,000 (2*600k)* 15% = 180,000 Diff 1,800,000/ 3yr=600k DTL = 120+180 = 300

23.Wright Co., organized on January 2, 2021, had pretax accounting income of $960,000 and taxable income of $3,120,000 for the year ended December 31, 2021. The only temporary difference is accrued product warranty costs which are expected to be paid as follows: 2022 $720,000 2023 360,000 2024 360,000 2025 720,000 The enacted income tax rates are 25% for 2021, 20% for 2022 through 2024, and 15% for 2025. If Wright expects taxable income in future years, the deferred tax asset in Wright's December 31, 2021 balance sheet should be a. $288,000. b. $360,000. c. $396,000. d. $540,000. Presentation on the B/S – net DTAs and DTLs and show as a single noncurrent amount. SU 9.9 Income Tax Accounting – other issues What is an NOL? An NOL is the excess of a business’s tax deductions for the tax year over its taxable income for that year. * *You will be told the entity’s options regarding NOL  you do not need to memorize current tax law (for FAR) 24.Operating income and tax rates for C.J. Company’s first three years of operations were as follows: Income Enacted tax rate 2020 $400,000 25% 2021 ($1,000,000) 20% 2022 $1,680,000 30% Assuming that C.J. Company opts only to carryforward its 2021 NOL, what is the amount of deferred tax asset or liability that C.J. Company would report on its December 31, 2021 balance sheet? Amount _ Deferred tax asset or liability a. $200,000 Deferred tax liability b. $250,000 Deferred tax liability c. $300,000 Deferred tax asset d. $200,000 Deferred tax asset The DTA/DTL are measured using the enacted tax rate(s). When these change, the impact is reflected in the period of the enactment (even if the rate relates to a future period). Specific disclosures for deferred taxes 1.Total DTL and Total DTA 2.Total DTA Valuation Allowance and the net annual change in it 3.The significant components of income tax expense related to continuing operations 4.Current income tax expense (benefit) and deferred income tax expense (benefit) recognized must be disclosed in EITHER the financial statements or the notes. 15

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