1.
Temporary Difference
The amount of difference between the pre-tax accounting income and taxable income, and the difference between the amount of assets and liabilities reported in the financial reports and the amount of assets and liabilities as per the company’s tax records, is referred as temporary difference.
When the Income Tax Expense account i.e. the estimated income tax amount is more than the outstanding amount of income tax i.e. the Income Tax Payable account, the difference is to be debited to Deferred Tax Asset account.
When the Income Tax Expense account i.e. the estimated income tax amount is less than the outstanding amount of income tax i.e. the Income Tax Payable account, the difference is to be credited to Deferred Tax Liability account.
To determine: Income tax expense and net income for the year ended December 31, 2018.
1.
Explanation of Solution
Amount ($)
Income before income taxes9,00,000
Income tax expense:
Current (1) 3,36,000
Net Income5, 40,000
Hence, the income tax expense and net income for the year ended December 31, 2018 is $360,000 and $540,000 respectively.
Working Notes:
Compute current portion of tax expense value.
Compute deferred tax liability value.
Compute desired ending balance of deferred tax liability amount for 2018 and 2017.
- (A) For 2018
Current Year |
Future Taxable Amount | |||
2018 | 2019 | 2020 | 2021 | |
Pretax accounting income | $9,00,000 | |||
Temporary difference: | ||||
Depreciation | ($60,000) | $20,000 | $30,000 | $40,000 |
Taxable income (tax return) | $8,40,000 | |||
Enacted tax rate | 40% | 40% | 40% | 40% |
Income Tax Payable | $3,36,000 (1) | |||
Deferred tax liability | $8,000 | $12,000 | $16,000 |
Table (1)
Total deferred tax liability on December 31, 2018 is $36,000
- (B) For 2017
Current Year |
Future Taxable Amount | ||||
2017 | 2018 | 2019 | 2020 | 2021 | |
Temporary difference: | |||||
Depreciation | ($60,000) | $20,000 | $30,000 | $40,000 | |
Enacted tax rate | 40% | 40% | 40% | 40% | |
Deferred tax liability | ($24,000) | $8,000 | $12,000 | $16,000 |
Table (2)
Total deferred tax liability on December 31, 2017 is $12,000
Compute deferred tax liability amount at December 31, 2018.
Deferred tax liability | |
Ending balance (current balance needed) | $36,000 |
Less: Beginning balance | $12,000 |
Change needed to achieve desired balance (2) |
$24,000 |
Table (3)
2.
To determine: Interest expense for the year ended December 31, 2018.
2.
Explanation of Solution
(Amount in $) | |
Interest expense on capital lease obligation (3) (A) | 7,367 |
Bonds payable(4) (B) | 36,568 |
Total interest expense (A+B) | 43,935 |
Table (4)
Working Notes:
Compute interest expense on capital lease obligation.
The balance of capital lease obligation at December 31, 2018 is $73,677 and rate of interest is 10% p.a.
Compute interest expense on bond payable.
Step 1:
Interest on bond is payable half yearly i.e. January 1 and July 1. For calculating interest expense on bond at December 31, 2018, we have to consider the July 1- December 31, 2018 time period i.e. six months.
Rate of yield is 10% p.a. that is 5% per six months, so for calculating interest expense for six months we have to consider 5%.
Step 2:
Present value of face value of bond.
Amount ($)
Face value of bond 8,00,000
PV factor at an annual market rate of 5% for 40 periods (a)× 0.14205
Present value of face value of bond 113,640
Note: Bond maturity period is 20 years but interest is payable half yearly, so the total time period will be 20 × 2 = 40 periods. Similarly, half yearly market rate (yield rate) is 5%
The present value of $1 for 40 periods at 5% is 0.14205 (refer present value table).
Step 3:
Present value of interest payments.
Amount ($)
Interest amount per six months 36,000
PV factor at an annual market rate of 5% for 40 periods (b)× 17.15909
Present value of interest payments 6,17,727
The present value of an ordinary annuity of $1 for 40 periods at 5% is 17.15909 (refer annuity present value table).
Step 4:
Calculate
Step 5:
Calculate interest expense.
3.
To prepare: Long term liabilities section of balance sheet at December 31, 2018.
3.
Explanation of Solution
The Long term liabilities section of balance sheet at December 31, 2018 is as follows:
C Transportation
Long term liabilities section of Balance Sheet
Long term Liabilities: | ||
Lease liability – 14 payments of $10,000 due annually on January 1 | $73,667 | |
Less: Current portion ($10,000 – 7,367) | ($2,633) | $71,034 |
9% bond payable due on June 30, 2029 | $8,00,000 | |
Less: Unamortized discount (balancing figure) | $68,065 | $731,935 |
Deferred income tax liability | $36,000 | |
Total long-term liabilities | $8,38,969 |
December 31, 2018
This problem will provide the basic understanding regarding the calculation of interest expense and income tax expense in case bond and lease. Additionally, it will describe the way of disclosure of interest expense of bond & lease and deferred tax liability in the balance sheet.
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Chapter 16 Solutions
INTERMEDIATE ACCOUNTING (LL) W/CONNECT
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