Concept explainers
1 (a)
Prepare a schedule that shows MACRS
1 (a)
Explanation of Solution
Prepare a schedule that shows MACRS depreciation from 2016 through 2019:
Year | MACRS Depreciation rate | MACRS Depreciation (Tax purpose) |
(1) | (2)=(1)×$60,000 | |
2016 | 33.33% | $19,998 |
2017 | 44.45% | $26,670 |
2018 | 14.81% | $8,886 |
2019 | 7.41% | $4,446 |
Table (1)
1 (b)
Prepare a schedule that shows straight line depreciation from 2016 through 2019.
1 (b)
Explanation of Solution
Straight-line Depreciation: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:
Depreciation cost = (Cost of the asset−Residual value)Estimated useful life of the asset
Prepare a schedule that shows straight line depreciation from 2016 through 2019.
Given, the cost of the asset is $60,000 and the estimated useful life is 4 years. So, the straight line depreciation is $15,000 ($60,0004 years) for each year.
Year | Straight line Depreciation (Financial reporting purpose) |
2016 | $15,000 |
2017 | $15,000 |
2018 | $15,000 |
2019 | $15,000 |
Table (2)
1 (c)
Prepare a schedule that shows the annual depreciation temporary difference from 2016 through 2019.
1 (c)
Explanation of Solution
Temporary Difference: Temporary difference refers to the difference of one income recognized by the tax rules and accounting rules of a company in different periods. Consequently 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 known as temporary difference.
Prepare a schedule that shows the annual depreciation temporary difference from 2016 through 2019:
Year | MACRS Depreciation (Tax purpose) | Straight line Depreciation (Financial reporting purpose) | Temporary difference between annual depreciation |
2016 | $19,998 | $15,000 | $4,998 |
2017 | $26,670 | $15,000 | $11,670 |
2018 | $8,886 | $15,000 | ($6,114) |
2019 | $4,446 | $15,000 | ($10,554) |
Table (3)
Note: The temporary difference of annual depreciation is calculated by subtracting MACRS depreciation (Requirement 1 (a)) and straight line depreciation (Requirement 1 (b)).
1 (d)
Prepare a schedule that shows the accumulated temporary difference from 2016 through 2019.
1 (d)
Explanation of Solution
Prepare a schedule that shows the accumulated temporary difference from 2016 through 2019:
Year | Temporary difference between annual depreciation | Accumulated Temporary difference |
2016 | $4,998 | $4,998 |
2017 | $11,670 | $16,668 |
2018 | ($6,114) | $10,554 |
2019 | ($10,554) | $0 |
Table (4)
Note: The accumulated temporary difference is determined by adding the temporary difference of annual depreciation of each of the year from 2016 through 2019.
2 (a)
Record the income tax
2 (a)
Explanation of Solution
Record the income tax journal entry at the end of 2016 for Company C.
Date | Account title and Explanation | Post ref. | Amount | |
Debit | Credit | |||
2016 | ||||
December 31 | Income tax expense (1) | $7,499 | ||
Income tax payable (2) | $6,000 | |||
| $1,449 | |||
(To record the income tax payable ) |
Table (5)
- Income tax expense is an expense that decreases the stockholder’s equity and it is increased. Thus, it is debited.
- Income tax Payable is a liability and it is increased. Thus, it is credited.
- Deferred tax liability is a liability and it is increased. Thus, it is credited.
Working note 1: Determine the income tax expense:
Income tax expense=Income tax payable+Deferred tax liability=$6,000+$1,499=$7,499
Working note 2: Determine the income tax payable:
Given, the taxable income is $20,000 and the tax rate is 30%.
Income tax payable=Taxable income×Corporate tax rate=$20,000×30%=$6,000
Working note 3: Determine the deferred tax liability:
Given, the accumulated temporary difference is $4,998 for year 2016 as computed in Table (4) and the tax rate is 30%.
Deferred tax liability=Future taxable amount×Tax rate=$4,998×30%=$1,499(rounded off)
2 (b)
Record the income tax journal entry at the end of 2017 for Company C.
2 (b)
Explanation of Solution
Record the income tax journal entry at the end of 2017 for Company C.
Date | Account title and Explanation | Post ref. | Amount | |
Debit | Credit | |||
2017 | ||||
December 31 | Income tax expense (4) | $11,601 | ||
Income tax payable (5) | $8,100 | |||
| $3,501 | |||
(To record the income tax payable ) |
Table (6)
- Income tax expense is an expense that decreases the stockholder’s equity and it is increased. Thus, it is debited.
- Income tax Payable is a liability and it is increased. Thus, it is credited.
- Deferred tax liability is a liability and it is increased. Thus, it is credited.
Working note 4: Determine the income tax expense:
Income tax expense=Income tax payable+Deferred tax liability=$8,100+$3,501=$11,601
Working note 5: Determine the income tax payable:
Given, the taxable income is $27,000 and the tax rate is 30%.
Income tax payable=Taxable income×Corporate tax rate=$27,000×30%=$8,100
Working note 6: Determine the deferred tax liability:
Given, the accumulated temporary difference is $16,668 for year 2017 as computed in Table (4) and the tax rate is 30%.
Deferred tax liability=[(Future taxable amount)×Tax rate]−(Beginning deferred tax liability)=($16,668×30%)−$1,499=$5,000 (rounded off)−$1,499=$3,501
2 (c)
Record the income tax journal entry at the end of 2018 for Company C.
2 (c)
Explanation of Solution
Record the income tax journal entry at the end of 2018 for Company C.
Date | Account title and Explanation | Post ref. | Amount | |
Debit | Credit | |||
2018 | ||||
December 31 | Income tax expense (balancing figure) | $8,366 | ||
Deferred tax liability (7) | $1,834 | |||
Income tax payable (8) | $10,200 | |||
(To record the income tax payable ) |
Table (7)
- Income tax expense is an expense that decreases the stockholder’s equity and it is increased. Thus, it is debited.
- Deferred tax liability is a liability and it is decreased. Thus, it is debited.
- Income tax Payable is a liability and it is increased. Thus, it is credited.
Working note 7: Determine the deferred tax liability:
Given, the accumulated temporary difference is $10,554 for year 2018 as computed in Table (4) and the tax rate is 30%.
Deferred tax liability=[(Future taxable amount)×Tax rate]−(Beginning deferred tax liability)=($10,554×30%)−$3,501(From 2020)=$3,166 (rounded off)−$3,501=($1,834) Decrease in deferred tax laibility
Working note 8: Determine the income tax payable:
Given, the taxable income is $34,000 and the tax rate is 30%.
Income tax payable=Taxable income×Corporate tax rate=$34,000×30%=$10,200
2 (d)
Record the income tax journal entry at the end of 2019 for Company C.
2 (d)
Explanation of Solution
Record the income tax journal entry at the end of 2019 for Company C.
Date | Account title and Explanation | Post ref. | Amount | |
Debit | Credit | |||
2019 | ||||
December 31 | Income tax expense (balancing figure) | $8,834 | ||
Deferred tax liability (9) | $3,166 | |||
Income tax payable (10) | $12,000 | |||
(To record the income tax payable ) |
Table (8)
- Income tax expense is an expense that decreases the stockholder’s equity and it is increased. Thus, it is debited.
- Deferred tax liability is a liability and it is decreased. Thus, it is debited.
- Income tax Payable is a liability and it is increased. Thus, it is credited.
Working note 9: Determine the deferred tax liability:
Given, the accumulated temporary difference is $0 for year 2019 as computed in Table (4) and the tax rate is 30%.
Deferred tax liability=[(Future taxable amount)×Tax rate]−(Deferred tax liability of all years)=($0×30%)−[$1,499−$3,501+$1,834(debit)]=$0−$3,166=$3,166(Decrease in deferred tax liability)
Working note 10: Determine the income tax payable:
Given, the taxable income is $40,000 and the tax rate is 30%.
Income tax payable=Taxable income×Corporate tax rate=$40,000×30%=$12,000
3 (a)
Prepare the lower portion of Company G’s income statement.
3 (a)
Explanation of Solution
Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Prepare the lower portion of Company G’s income statement:
Company G | |
Income Statement | |
For the year ended 2016 | |
Pretax Operating Income | $24,998 |
Less: Income tax expense | ($7,499) |
Net Income | $17,499 |
Table (9)
Thus, the net income of Company G is $17,499.
3 (b)
Prepare the lower portion of Company G’s income statement.
3 (b)
Explanation of Solution
Prepare the lower portion of Company G’s income statement:
Company G | |
Income Statement | |
For the year ended 2017 | |
Pretax Operating Income | $38,670 |
Less: Income tax expense | ($11,601) |
Net Income | $27,069 |
Table (10)
Thus, the net income of Company G is $27,069.
3 (c)
Prepare the lower portion of Company G’s income statement.
3 (c)
Explanation of Solution
Prepare the lower portion of Company G’s income statement:
Company G | |
Income Statement | |
For the year ended 2018 | |
Pretax Operating Income | $27,886 |
Less: Income tax expense | ($8,366) |
Net Income | $19,520 |
Table (11)
Thus, the net income of Company G is $19,520.
3 (d)
Prepare the lower portion of Company G’s income statement.
3 (d)
Explanation of Solution
Prepare the lower portion of Company G’s income statement:
Company G | |
Income Statement | |
For the year ended 2019 | |
Pretax Operating Income | $29,446 |
Less: Income tax expense | ($8,834) |
Net Income | $20,612 |
Table (12)
Thus, the net income of Company G is $20,612.
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Chapter 18 Solutions
Intermediate Accounting: Reporting and Analysis
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningFinancial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning