PR Exercise 19

E19.1 (LO1, 2) (One Temporary Difference, Future Taxable Amounts, One

Rate, No Beginning Deferred Taxes) Starfleet Corporation has one temporary
difference at the end of 2018 that will reverse and cause taxable amounts of
$55,000 in 2019, $60,000 in 2020, and $75,000 in 2021. Starfleet's pretax
financial income for 2018 is $400,000, and the tax rate is 30% for all years.
There are no deferred taxes at the beginning of 2018.
Instructions
a. Compute taxable income and income taxes payable for 2018.
b. Prepare the journal entry to record income tax expense, deferred income
taxes, and income taxes payable for 2018.
c. Prepare the income tax expense section of the income statement for 2018,
beginning with the line “Income before income taxes.”

(a) Pretax financial income for 2018...................................................................................... $400,000

Temporary difference resulting in future taxable
amounts in 2019.................................................................................................. (55,000)
in 2020.................................................................................................. (60,000)
in 2021.................................................................................................. (75,000
Taxable income for 2018.................................................................................................. $210,000

Taxable income for 2018.................................................................................................. $210,000

Enacted tax rate............................................................................................................... X 30%
Income taxes payable for 2018......................................................................................... $ 63,000

(b) Future Years

2019 2020 2021 Total
Future taxable (deductible) amounts $55,000 $60,000 $75,000 $190,000
Tax rate X 30% X 30% X 30%
Deferred tax liability (asset) $16,500 $18,000 $22,500 $ 57,000

Deferred tax liability at the end of 2018......................................... $ 57,000

Deferred tax liability at the beginning of 2018................................ 0
Deferred tax expense for 2018 (increase in
deferred tax liability).................................................................. 57,000
Current tax expense for 2018
   (Income taxes payable)................................................................ 63,000
Income tax expense for 2018.......................................................... $120,000

Income Tax Expense....................................................................... 120,000

Income Taxes Payable........................................................... 63,000
 Deferred Tax Liability............................................................ 57,000

(c) Income before income taxes........................................................... $400,000

Income tax expense
Current................................................................................. $63,000
Deferred............................................................................... 57,000 120,000
Net income..................................................................................... $280,000

E19.2 (LO1) (Two Differences, No Beginning Deferred Taxes, Tracked

through 2 Years) The following information is available for McKee plc for 2019.
1. Excess of tax depreciation over book depreciation, Åí40,000. This Åí40,000
difference will reverse equally over the years 2020–2023.
2. Deferral, for book purposes, of Åí25,000 of rent received in advance. The
rent will be recorded as revenue in 2020
3. Pretax financial income, Åí350,000.
4. Tax rate for all years, 40%.
Instructions
a. Compute taxable income for 2019.
b. Prepare the journal entry to record income tax expense, deferred income
taxes, and income taxes payable for 2019.
c. Prepare the journal entry to record income tax expense, deferred income
taxes, and income taxes payable for 2020, assuming taxable income of
325,000.

(a) Pretax financial income for 2019................................................... £350,000

Excess of tax depreciation over
   book depreciation...................................................................... (40,000)
Rent received in advance.............................................................. 25,000
Taxable income................................................................... £335,000

(b) Income Tax Expense..................................................................... 140,000

Deferred Tax Asset....................................................................... 10,000*
Income Taxes Payable (£335,000 X .40)............................... 134,000
Deferred Tax Liability..........................................................
16,000**

Temporary Future Taxable (Deductible) Tax Rate Deferred Tax

Difference Amounts
(c) Income Tax Expense..................................................................... 136,000*
Deferred Tax Liability (£10,000 X .40)........................................... 4,000
Income Taxes Payable (£325,000 X .40)............................... 130,000
Deferred Tax Asset (£25,000 X .40)......................................
10,000

*(£130,000 – £4,000 + £10,000)

E19.5 (LO1, 2) (Two Temporary Differences, One Rate, Beginning Deferred

Taxes) The following facts relate to Alschuler plc.
1. Deferred tax liability, January 1, 2019, 40,000.
2. Deferred tax asset, January 1, 2019, Åí0.
3. Taxable income for 2019, Åí115,000.
4. Pretax financial income for 2019, Åí200,000.
5. Cumulative temporary difference at December 31, 2019, giving rise to future
taxable amounts, Åí220,000.
6. Cumulative temporary difference at December 31, 2019, giving rise to future
deductible amounts, Åí35,000.
7. Tax rate for all years, 40%.
8. The company is expected to operate profitably in the future.
Instructions
a. Compute income taxes payable for 2019.
b. Prepare the journal entry to record income tax expense, deferred income
taxes, and income taxes payable for 2019.
c. Prepare the income tax expense section of the income statement for 2019,
beginning with the line “Income before income taxes.”
EXERCISE 19.5 (15–20 minutes)

(a) Taxable income.............................................................................. £115,000

Enacted tax rate............................................................................. X 40%
Income taxes payable.................................................................... £ 46,000

(b) Income Tax Expense....................................................................... 80,000

Deferred Tax Asset......................................................................... 14,000
Income Taxes Payable...........................................................
 Deferred Tax Liability............................................................

Temporary Future Taxable (Deductible) Tax Rate Deferred Tax

Difference Amounts (Asset) Liability
Item one (£220,000 40% £88,000
Item two ( (35,000) 40% £(14,000)              
Totals £185,000 £(14,000) £88,000

*Because of a flat tax rate, these totals can be reconciled: £185,000 X 40% = £(14,000) +
£88,000.

Deferred tax liability at the end of 2019.......................................................... £ 88,000

Deferred tax liability at the beginning of 2019................................................. (40,000
Deferred tax expense for 2019 (increase
required in deferred tax liability)................................................................. £ 48,000

Deferred tax asset at the end of 2019.............................................................. £ (14,000

Deferred tax asset at the beginning of 2019.................................................... 0
Deferred tax benefit for 2019 (increase
required in deferred tax asset)..................................................................... £ (14,000

Deferred tax expense for 2019........................................................................ £ 48,000

Deferred tax benefit for 2019.......................................................................... (14,000
Net deferred expense for 2019........................................................................ 34,000
Current tax expense for 2019 (Income taxes payable)..................................... 46,000
Income tax expense for 2019...................................................... £ 80,000

(c) Income before income taxes....................................................... £200,000

Income tax expense
Current.............................................................................. £46,000
Deferred ....... 34,000
....... 80,000
Net income................................................................................. £120,000

Note to instructor: Because of the flat tax rate for all years, the amount of cumulative
temporary difference existing at the beginning of the year can be calculated by dividing
the £40,000 balance in Deferred Tax Liability by 40%, which equals £100,000. This
information may now be combined with the other facts given in the exercise to
reconcile pretax financial income with taxable income as follows:
 Pretax financial income................................................................................... £200,000
Net originating temporary difference
giving rise to future taxable amounts
(£220,000 – £100,000).................................................................................. (120,000)
Originating temporary difference giving
rise to future deductible amounts................................................................ 35,000
Taxable income............................................................................................... £115,000

E19.6 (LO1, 2) (Identify Temporary or Permanent Differences) The following

items 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. ______ An accelerated depreciation system is used for tax purposes, and
the straight-line depreciation method is used for financial reporting purposes
for some plant assets.
b. ______ A landlord collects some rents in advance. Rents received are
taxable in the period when they are received.
c. ______ Expenses are incurred in obtaining tax-exempt income.
d. ______ Costs of guarantees and warranties are estimated and accrued for
financial reporting purposes.
e. ______ Installment sales of investments are accounted for by the accrual
method for financial reporting purposes and the installment method for tax
purposes.
f. ______ Interest is received on an investment in tax-exempt governmental
obligations.
g. ______ 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.
h. ______ The tax return reports a deduction for 80% of the dividends
received from various corporations. The cost method is used in accounting
for the related investments for financial reporting purposes.
i. ______ 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.
j. ______ Expenses on share options are accrued for financial reporting purposes

EXERCISE 19.6 (10–15 minutes)

(a) (2) (e) (2) (i)(1)

(b) (1) (f) (3) (j)(1)
(c) (3) (g) (2)
(d) (1) (h) (3)*

*When the cost method is used for financial reporting purposes, the dividends are recognized
in the income statement in the period they are received, which is the same period they must be
reported on the tax return. Various countries permit companies that receive dividend income
from another company to treat part of these dividends as tax-exempt