A depreciable asset was purchased 7/1/x1. The cost was $30,000. Ignore salvage value. Useful life is 6 years. The life for tax purposes is 4 years. Straight-line depreciation is used for books and tax. 20x1 pretax accounting income is $10,000. The tax rate is 40% in 20x1. The tax rate is expected to be 40% in 20x2 and 20x3 and will decline to 35% for all years after 20x3. ACC 302 - Deferred Taxes- Activity 4 A depreciable asset was purchased 7/1/X1. The cost was $30,000. Ignore salvage value. Useful life is 6 years. The life for tax purposes is 4 years. Straight-line depreciation is used for book and tax. 20x1 pretax accounting income is $10,000. The tax rate is 40% in 20x1. The tax rate is expected to be 40% in 20x2 and 20x3 and will decline to 35% for all years after 20x3. 1. Fill in the following table. Year Depreciation Depreciation TI greater than Temporary Difference or Tax in TI in Al (less than) AI Taxable/Deductible Amts Rate 30,000/4 30000/6 TD=1,250 405 20x1 X.5= 3,750 x.5=2,500 2,500 40 20X2 7,500 5,000 20x3 7,500 5,000 2,500 40% 437.50 G 437.50 end $437.50 LONG TERM 8. Income Tax Expense: Income Tax Payable Increase in Deferred Tax Liability Income Tax Expense 3,500 437.50 = 3,937.50 9. Make the journal entry to record income tax expense for 20x1. Income Tax Expense 3,937.50 Deferred Tax Liability Income Tax Payable 437.50 3,500 10. Assume pretax accounting Income (loss) of ($8,000) for 20x2. Taxable income (loss) for 20x2: Accounting Income (Loss) (8,000) Temporary Difference -2,500 Net Operating Loss (NOL) --10,500 Carryback 2 years Carryover 17 years 11. If the company chooses to carry the loss back, how much refund will they receive for 20x1 taxes paid? The -10,500 > PY TI of 8,750 so the full amount of taxes paid of 3,500 vill be refunded 12 The refund will be a CURRENT ASSET or LONG TERM ASSET 14. 20x2 13. 20x2, Cumulative Temporary Difference and year of reversal Amount Year of Reversal 20x1 Temporary Difference (from Chart) 1.250 20x2 Temporary Difference (from Chart) 2.500 Cumulative Temporary Difference 3,750 Schedule the current and future tax consequences for 20x2. For now, ignore the future tax benefit of the NOL carryover. Description 20x1 Description 20x3 20x4 20:45 20x6 20x7 TI (loss) 8,750 (10,500) TA 1250 2500 Tax Rate x 40% na Tax Rate 35% Taxes Tax 3,500 Payable consequences 437. 875 50 Carryback 8750 na Tax Rate na 20x2 Tax 3500 Refund na 437.5 - 875 15. The amount of deferred DTL is = 1312.50 na 40% 16. 17. It will be classified as SHORT TERM or LONG TERM The amount of NOL carryover: 2012 NOL (10,500) Amount Carried Back to 20x1 8,750 NOL Carryover to 20x3 = 1,750 1,750 x 356 The future tax consequence of the NOL carryover is = 612.50 Draw T accounts for the DTL and DTA Deferred Tax Asset Deferred Tax Liability 0 437.50 612 50 875 18. 19. 612.50 1.312.50 20. Make the journal entry to record income taxes for 20x2. Income Tax Refund Receivable 3,500 Deferred Tax Asset 612.50 Deferred Tax Liability 875 3.237.50 Income Tax Benefit Assume an accounting loss of (10,000) for 20x3, and that due to changes in the tax law, tax rates for the current and futuro years changed to 30%. Calculate the tax loss carryover for 20x3. Accounting Loss (10,000) 20x3 Temporary Difference (from Chart) ( 2,500) 21. -12,500 Taxable income (loss) before special deductions - 1750 NOL Carryover from 20x2 to 20x3 NOL Carryover to 20x4 -14250 22 20x3, Cumulative Temporary Difference and year of reversal Amount 20x1 Temporary Difference (from Chart) 1,250 20x2 Temporary Difference (from Chart) 2,500 20x3 Temporary Difference (from Chart) 2,500 Cumulative Temporary Difference 6,250 23. Schedule the current and future tax consequences for 20x3. For now, ignore the future tax benefit of the NOL carryover Description 20x2 20x3 Description 20x4 20x5 20x6 20x7 TI (loss) (10,500) (12,500) TA 1,250. 5,000 NOL 8,750 na Tax Rate 306 Carryback NOL 1,750 14,250 Tax 375 1,500 Carryover consequences 305 = 375 - 1500 1,875 24. The amount of deferred DTL IS 25. It will be classified as SHORT TERM or LONG TERM 26. X 30% = 4,275 The amount of NOL carryover is $14,250 The amount of the future tax consequence is 27. 28. This amount is considered a DTA DTL Assume enough uncertainty that future income cannot be counted on to occur. How much of the deferred tax asset is realizable? - 1875 29. Determine the balance in the DTA allowance account: Deferred Tax Asset Realizable Value 4,275 1,875 2,400 DTA Valuation Allowance 30. What will appear in the balance sheet related to the DTA? Deferred Tax Asset 4,275 DTA Valuation Allowance 2,400 -1,875 Net Deferred Tax Asset Deferred Tax Liability -1875 0 Net DTA(DTL) 31. Draw T accounts for the DTL, DTA, and DTA Valuation Allowance' Deferred Tax Liability Deferred Tax Asset Valuation Allowance 1312.50 562.50 612.5 3,662.50 0 2400 1875 4,275 2400 3662.50 32. Make the journal entry to record taxes. Deferred Tax Asset Valuation Allowance for DTA Deferred Tax Liability Income Tax Benefit 2400 562.50 700 34 The cumulative temporary difference for depreciation: 20x1 Temporary Difference (from Chart) 1,250 2012 Temporary Difference (from Chart) 2,500 20x3 Temporary Difference (from Chart) 2,500 20x4 Temporary Difference (from Chart) 2,500 Cumulative Temporary Difference =8,750 This difference will be associated with future TAXABLE AMOUNTS DEDUCTIBLE AMOUNTS 8000 The 20x4 temporary difference for the law sult is This difference will be associated with future TAXABLE AMOUNTS O DEDUCTIBLE AMOUNTS 35. Schedule the current and future tax consequences for 20x4. Description 20x2 20x3 20x4 Description 20x5 20x6 20x7 TI (loss) (10,500) (12,500) 9500 Taxable amounts 1250 5000. 2500 NOL 8,750 Tax Rate Carryback 304, NOL Carryover 1500. 750 1,750 14,250 Consequences 4,750 Deductible Amounts na Na 305 30 Tax 375 36 =375+1500+750 2625 The amount of deferred DTL is It will be classified as 37. SHORT TERM or LONG TERM 38. The balance in the deferred tax asset is 4,750 B000 NOL Carryover Temporary difference due to lawsuit Total deductible amounts Tax rato Deferred Tax Asset = 12750 303 3,825 39. The balance in the allowance account is 0 No evidence to indicate that it is more than likely than not that the DTA will not be realized 40. Make T accounts for the DTL, DTA, and DTA Alowance Accounts Deferred Tax Liability Valuation Allowance Deferred Tax Asset 4275 1875 2400 2400 750 450 2625 3825 41. Make the journal entry to record taxes. 2400 Valuation Allowance Deferred Tax Asset Deferred Tax Liability Income Tax Benefit 450 750 1,200 ACC 302 - Deferred Taxes- Activity 4 Complete this activity at home and turn it in next class period. 42. Assume no additional temporary differences occur and that each year following 20x4 pretax accounting income is $12,000. Schedule the tax consequences and record them for 20x5 - 20x7. Assume no additional temporary differences occur and that each year following 20x4 pretax accounting income is $12,000. Schedule the tax consequences and record them for 20x5 - 20x7. Show transcribed image text