Income Taxes

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E 16-1 Temporary difference; taxable income given LO1
Alvis Corporation reports pretax accounting income of $400,000, but due to a single temporary difference, taxable income is only $250,000. At the beginning of the year, no temporary differences existed. Required:

1. Assuming a tax rate of 35%, what will be Alvis's net income? 2. What will Alvis report in the balance sheet pertaining to income taxes?

Solution:
Requirement 1
Since taxable income is less than pretax accounting income, a future taxable amount will occur when the temporary difference reverses. This means a deferred tax liability should be recorded to reflect the future tax consequences of the temporary difference.

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Income tax expense (to balance)140,000
Deferred tax liability ([$400,000 - 250,000] x 35%)52,500
Income tax payable ($250,000 x 35%) 87,500

As a result, net income is $260,000:

Pretax accounting income$400,000
Income tax expense 140,000
Net income$260,000

Requirement 2
In its balance sheet, Alvis will report the $52,500 deferred tax liability among either its current or long-term liabilities depending on the cause of the temporary difference and the $87,500 income tax payable as a current liability. -------------------------------------------------

E 16-2 Determine taxable income; determine prior year deferred tax amount LO1 On January 1, 2008, Ameen Company purchased a building for $36 million. Ameen uses straight-line depreciation for financial statement reporting and MACRS for income tax reporting. At December 31, 2010, the carrying value of the building was $30 million and its tax basis was $20 million. At December 31, 2011, the carrying value of the building was $28 million and its tax basis was $13 million. There were no other temporary differences and no permanent differences. Pretax accounting income for 2011 was $45 million. Required:

1. Prepare the appropriate journal entry to record Ameen's 2011 income taxes. Assume an income tax rate of 40%. 2. What is Ameen's 2011 net income?

Solution:
Requirement 1
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($ in millions)
CurrentFuture
YearTaxable
2011Amount
[total]
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Pretax accounting income 45
Temporary difference:
Depreciation($30 – 20) – ($28 – 13) = (5)15 ($28 – 13)

Taxable income (tax return)40

Enacted tax rate 40% 40%
Tax payable currently 16
Deferred tax liability6
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Deferred tax liability:
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Ending balance (balance currently needed)$ 6
Less: beginning balance ($30 – 20) x 40% (4)
Change needed to achieve desired balance $ 2
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Journal entry at the end of 2011
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Income tax expense (to balance)18
Deferred tax liability (determined above)2
Income tax payable (determined above) 16
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Requirement 2
($ in millions)
Pretax income$45
Income tax expense (18)
Net income$27

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E 16-4 Temporary difference; income tax payable given LO2
In 2011, DFS Medical Supply collected rent revenue for 2012 tenant occupancy. For income tax reporting, the rent is taxed when collected. For financial statement reporting, the rent is recognized as income in the period earned. The unearned portion of the rent collected in 2011 amounted to $300,000 at December 31, 2011. DFS had no temporary...
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