Concept explainers
During 2019, Cooke reported pretax financial income of $51,500 and taxable income of $44,000. The depreciation temporary difference caused the difference between the two income amounts. The tax rate in 2019 was 30%, and no change in the tax rate had been enacted for future years.
Required:
- 1. Prepare a schedule that shows for each year, 2019 through 2026, (a) MACRS depreciation, (b) straight line depreciation, (c) the annual depreciation temporary difference, and (d) the accumulated temporary difference at the end of each year.
- 2. Prepare a schedule that computes for each year, 2019 through 2026, (a) the ending deferred tax liability and (h) the change in the deferred tax liability.
- 3. Prepare Cooke’s income tax
journal entry at the end of 2019. - 4. Next Level Explain what happens to the balance of the deferred tax liability at the end of 2019 through 2026.
1(a)
Prepare a schedule that shows MACRS depreciation from 2019 through 2026.
Explanation of Solution
Prepare a schedule that shows MACRS depreciation from 2019 through 2026:
Year | MACRS Depreciation rate | MACRS Depreciation (Tax purpose) |
(1) | ||
2019 | 20% | $20,000 |
2020 | 32% | $32,000 |
2021 | 19.20% | $19,200 |
2022 | 11.52% | $11,520 |
2023 | 11.52% | $11,520 |
2024 | 5.76% | $5,760 |
2025 | 0% | $0 |
2026 | 0% | $0 |
Table (1)
1 (b)
Prepare a schedule that shows straight line depreciation from 2019 through 2026.
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:
Prepare a schedule that shows straight line depreciation from 2019 through 2026.
Given, the cost of the asset is $100,000 and the estimated useful life is 8 years. So, the straight line depreciation is $12,500
Year | Straight line Depreciation (Financial reporting purpose) |
2019 | $12,500 |
2020 | $12,500 |
2021 | $12,500 |
2022 | $12,500 |
2023 | $12,500 |
2024 | $12,500 |
2025 | $12,500 |
2026 | $12,500 |
Table (2)
1 (c)
Prepare a schedule that shows the annual depreciation temporary difference from 2019 through 2026.
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 2019 through 2026:
Year | MACRS Depreciation rate | Straight line Depreciation (Financial reporting purpose) | Temporary difference of annual depreciation |
2019 | 20% | $12,500 | $7,500 |
2020 | 32% | $12,500 | $19,500 |
2021 | 19.20% | $12,500 | $6,700 |
2022 | 11.52% | $12,500 | ($980) |
2023 | 11.52% | $12,500 | ($980) |
2024 | 5.76% | $12,500 | ($6,740) |
2025 | 0% | $12,500 | ($12,500) |
2026 | 0% | $12,500 | ($12,500) |
Table (3)
1 (d)
Prepare a schedule that shows the accumulated temporary difference from 2019 through 2026.
Explanation of Solution
Prepare a schedule that shows the accumulated temporary difference from 2019 through 2026:
Year | Temporary difference of annual depreciation | Accumulated Temporary difference |
2019 | $7,500 | $7,500 |
2020 | $19,500 | $27,000 |
2021 | $6,700 | $33,700 |
2022 | ($980) | $32,720 |
2023 | ($980) | $31,740 |
2024 | ($6,740) | $25,000 |
2025 | ($12,500) | $12,500 |
2026 | ($12,500) | $0 |
Table (4)
Note: The temporary difference is computed in Table (3) of requirement 1 (c).
2 (a)
Prepare a schedule that calculates the ending deferred tax liability from 2019 through 2026.
Explanation of Solution
Deferred tax liability: Deferred tax liability is created, if the tax obligation (income tax payable) is deferred temporarily due to differences in reporting revenue or expense at different time periods on the income statement (financial reporting) and on tax return (tax reporting).
Prepare a schedule that calculates the ending deferred tax liability from 2019 through 2026:
Year | Accumulated Temporary difference | Tax rate | Ending deferred tax liability |
2019 | $7,500 | 30% | $2,250 |
2020 | $27,000 | 30% | $8,100 |
2021 | $33,700 | 30% | $10,110 |
2022 | $32,720 | 30% | $9,816 |
2023 | $31,740 | 30% | $9,522 |
2024 | $25,000 | 30% | $7,500 |
2025 | $12,500 | 30% | $3,750 |
2026 | $0 | 30% | $0 |
Table (5)
Note: The accumulated temporary difference is computed in requirement 1 (d).
2 (b)
Prepare a schedule that calculates the changes in deferred tax liability from 2019 through 2026.
Explanation of Solution
Prepare a schedule that calculates the changes in deferred tax liability from 2019 through 2026:
Year | Ending deferred tax liability | Beginning deferred tax liability | Change in deferred tax liability |
2019 | $2,250 | $0 | 2,250 |
2020 | $8,100 | $2,250 | 5,850 |
2021 | $10,110 | $8,100 | 2,010 |
2022 | $9,816 | $10,110 | (294) |
2023 | $9,522 | $9,816 | (294) |
2024 | $7,500 | $9,522 | (2,022) |
2025 | $3,750 | $7,500 | (3,750) |
2026 | $0 | $3,750 | (3,750) |
Table (6)
Note: The ending deferred tax liability is computed in requirement 2 (a) and the ending deferred tax liability of 2019 is the beginning deferred tax liability for 2020 and so on
3.
Record the income tax journal entry at the end of 2019 for Company C.
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 (1) | $15,450 | ||
Income tax payable (2) | $13,200 | |||
Deferred tax liability | $2,250 | |||
(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.
- 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:
Working note 2: Determine the income tax payable:
Given, the taxable income is $44,000 and the tax rate is 30%.
Note: The deferred tax liability is $2,250 for year 2019 as computed in Table (6).
4.
Elaborate the effects of the balance of deferred tax liability from 2019 through 2026.
Explanation of Solution
As per table (5), the balance of the deferred tax liability account increases (originates) at the end of 2019 from $2,250 to $10,110 in 2021 , and then declines (reverses) at the end of 2022 through 2026, which reduces to zero at the end of 2026.
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Chapter 18 Solutions
Intermediate Accounting: Reporting And Analysis
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- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningIndividual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT