InClassExerciseCh.16

InClassExerciseCh.16 - In‐Class Exercises Chapter 16...

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Unformatted text preview: In‐Class Exercises Chapter 16 Exercise #1 For the following independent scenarios, tell whether this is a permanent difference or a temporary difference. If it is a temporary difference, state whether it creates a deferred tax asset or liability. a) You accrue an expense in the current year that is not deductable under tax law. b) You record the first year of an asset’s depreciation expense based on straight‐line allocation for financial reporting. The tax code requires deducting depreciation based on double‐declining balance method. c) You receive the proceeds of a life insurance policy for a deceased officer which is considered revenue under US GAAP. Under the tax code, the proceeds are not taxable. d) You recognize service revenue in the current period, accepting a note from your customer to pay for the service in the next fiscal year. Under the tax code, the taxable service revenue will be recorded when the note is paid. e) You record an expense in the current period that will be paid for in the next fiscal year, based on US GAAP. However, the tax code defers the deduction until the payment is actually made. f) You account for long‐term construction contracts by the “completed contract” method in which you wait until the end of the contract to recognize revenues and customer payments are recorded as “unearned revenue.” Under the tax code, the customer payments are taxable when received. Exercise #2 Ajax Company began operations on January 1, 2009. For 2009, Ajax reported pretax financial income of $200,000 (Ajax expects this income to continue through 2011). Ajax uses straight‐line depreciation for financial reporting and accelerated depreciation for tax purposes. Below is a table summarizing these temporary differences: Depreciation Expense US GAAP Tax Code Reporting Deduction 2009 (actual) $ 25,000 $ 40,000 2010 (estimated) 25,000 20,000 2011 (estimated) 25,000 15,000 Total $75,000 $75,000 The tax rate in 2009 is 40%; this rate is expected to stay constant through 2011. Required: Provide journal entries to record income tax expense and deferred tax liability. ACCT 4050 Page 1 of 13 Chapter 16 ‐ In‐Class Exercises In‐Class Exercises Exercise #3 Chapter 16 Ajax Company began operations on January 1, 2009. One service Ajax provides is financial services to individual investors using binding three year contracts payable in advance. US GAAP requires that the revenue collected in the first year be recognized as it is earned over the three‐year contract term. The tax code recognizes the full contract revenue in year 1. Ajax’s only expense other than taxes is salaries of $95,000 per year. Below is a table summarizing the book‐tax temporary differences: Revenue US GAAP Tax Code Reporting Reporting 2009 (actual) $ 200,000 $ 400,000 2010 (estimated) 200,000 100,000 2011 (estimated) 200,000 100,000 $600,000 Total $600,000 The tax rate in 2009 is 35%; this rate is expected to stay constant through 2011. Required: Provide journal entries to record income tax expense and deferred tax asset. Exercise #4 Ajax Company began operations on January 1, 2009. For 2009, Ajax reported pretax financial income of $150,000 (Ajax expects this income to continue through 2012). Two parts of Ajax’s operations involve differences in financial and tax accounting: fixed assetdepreciation and warranty costs. Below is a table summarizing these temporary differences: Financial Reporting Depreciation Warranty Expense Expense Income Tax Reporting Depreciation Warranty Deduction Deduction $ 0 8,000 12,000 16,000 $36,000 2009 (actual) $ 32,000 $ 36,000 $ 51,200 2010 (estimated) 32,000 0 38,400 2011 (estimated) 32,000 0 32,000 0 6,400 2012 (estimated) 32,000 Total $128,000 $36,000 $128,000 The tax rate in 2009 is 40%; this rate is expected to stay constant through 2012. Required: Provide journal entries to record income tax expense, deferred tax assets (if any), and deferred tax liabilities (if any). ACCT 4050 Page 2 of 13 Chapter 16 ‐ In‐Class Exercises In‐Class Exercises Exercise #5 Chapter 16 Comet Company reported the following deferred tax assets on their 2009 financial statements: Deferred tax assets—Current $22,500 Deferred tax assets—Noncurrent $56,700 In 2010, Comet reported taxable income of $150,000 before adjustments for deferred tax assets. In addition, $11,340 of the noncurrent tax asset was judged to have become current. Finally, Comet’s Controller has determined that, due to negative income projections, it is likely that $15,000 of the remaining deferred tax assets will not be realized. Tax rates in 2009 and the foreseeable future are 36%. Required: Prepare journal entries necessary to correctly account for the above information. Exercise #6 Ajax Company began operations on January 1, 2009. For 2009, Ajax reported pretax financial income of $200,000 (Ajax expects this income to continue through 2012). Ajax uses straight‐line depreciation for financial reporting and accelerated depreciation for tax purposes. Below is a table summarizing these temporary differences: Depreciation Expense US GAAP Tax Code Reporting Deduction Tax Rate 2009 (actual) $ 35,000 $ 56,000 40% 2010 (estimated) 35,000 42,000 38% 2011 (estimated) 35,000 28,000 35% 14,000 32% 2012 (estimated) 35,000 $140,000 Total $140,000 The tax rate in 2009 is 40% but is scheduled to decrease each year as shown above. Required: Provide journal entries to record income tax expense and deferred tax liability. ACCT 4050 Page 3 of 13 Chapter 16 ‐ In‐Class Exercises In‐Class Exercises Exercise #7 Chapter 16 Ajax Inc. is part of an industry that experiences a high degree of volatility—high earnings one year, losses the next. Therefore, Ajax takes frequent advantage of the tax code’s provisions for Net Operating Loss carrybacks and carryforwards. Below is a table with annual taxable income for a series of years. Ajax began operations on January 1, 2007. Year Income (Loss) Tax Rate Income Tax 2007 $145,000 40% $58,000 2008 50,000 40% 20,000 2009 (65,000) 37% 0 2010 110,000 37% 40,700 2011 (385,000) 35% 0 2012 200,000 35% 70,000 2013 350,000 35% 122,500 Required: Prepare the journal entries for each year to take advantage of all permitted NOL carrybacks and carryforwards. Exercise #8 Ajax Company reports the following information: Income Statement Items: 2009 Net Income $150,000 Depreciation 24,500 Income tax expense 45,000 Balance Sheet Items: 2009 2008 Accounts receivable 28,600 26,000 Income taxes payable 3,000 1,000 Deferred Tax Asset—current 2,800 3,500 Deferred tax liability—current 5,500 7,550 Required: Using the indirect method, prepare Ajax’s cash flows from operations section of the Cash Flow Statement for 2009 (including any required note). ACCT 4050 Page 4 of 13 Chapter 16 ‐ In‐Class Exercises ...
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This note was uploaded on 04/06/2011 for the course ACCT 4050 taught by Professor Rodney during the Spring '11 term at UGA.

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