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.

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.

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 2012 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 in TI in Al (less than) AI Taxable/Deductible Amts Rate 30,000/4 TD=1,250 X.5=3,750 x.5=2,500 Tax 30000/6 404 20x1 2,500 40% 20X2 7,500 5,000 20x3 7,500 5,000 2,500 40% 20x4 7,500 5,000 2,500 35% 20x5 3,750 5,000 1,250 35% 5,000 5,000 35% 20x8 5,000 5,000 35% 20x7 2. 10,000 Taxable income and taxes payable for 20x1: Pretax Accounting Income Temporary Difference Taxable income Tax Rate -1,250 = 8,250 404 Income Tax Payable = 3,500 3. 20x5 4. According to the above chart, the 20x1 temporary difference is $1.250. Reversal of the temporary difference will occur in what year? The reversing differences will be GTAXABLE AMOUNTS DEDUCTIBLE AMOUNTS The deferred tax consequence for the twitemporary unference is a DEFERRED TAX ASSET (DTA) REFERRED TAX LIABILITY (DTL) or 20x5 ACC 302 - Deferred Taxes- Activity 4 Schedule the current and future tax consequences for 20x1. Description 20x1 Description 2012 20x3 20x4 Taxable TA Income 8,750 Tax Rate x 40% Tax Rate 20x6 20x7 1,250 X35% Taxes Payable 3,500 Tax Consequence 437.5 6. The amount of deferred DTL IS $ 437.50 7. LONG TERM It will be classified as SHORT TERM OF Deferred Tax Liability beg 0 Cr to DTL -> 437.50 437.50 end 8. 3,500 Income Tax Expense: Income Tax Payable Increase in Deferred Tax Liability Income Tax Expense 437.50 = 3, 937.50 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 20x22: 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 will be refunded 12 The refund will be a CURRENT ASSET or LONG TERM ASSET 13. 20x2, Cumulative Temporary Difference and year of reversal Amount Year of Reversal 20x1 Temporary Difference (from Chart) 1.250 20x2 Temporary Differenon (from Chart) 2,500 Cumulative Temporary Difference 3,750 14. Schedule the current and future tax consequences for 20x2. For now, ignore the future tax benefit of the NOL carryover. Description 20x1 20x2 Description 20x3 20x4 20x5 20x6 20x7 Tl (loss) 8,750 (10,500) TA 1250 2500 Tax Rate x 40% 35% Tax Rate 35% Taxes 3,500 na Tax Payable consequences 437. 875 50 Carryback 8750 na Tax Rate 40% na 20x2 Tax 3500 Refund na 437.5 + 875 15. The amount of deferred DTL is = 1312.50 16. It will be classified as SHORT TERM or LONG TERM 17. The amount of NOL carryover: 202 NOL (10,500) Amount Carried Back to 20x1 8,750 NOL Carryover to 20x3 = 1,750 18. 1,750 x 356 = 612.50 The future tax consequence of the NOL carryover is Draw T accounts for the DTL and DTA Deferred Tax Asset 19. Deferred Tax Liability 0 437.50 61250 875 612.50 1.312.50 20. 612.50 21. Make the journal entry to record income taxes for 20x2. Income Tax Refund Receivable 3,500 Deferred Tax Asset 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) Taxable Income (loss) before special deductions -12,500 NOL Carryover from 20x2 to 20x3 -1750 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 30% 305 Carryback NOL Carryover 1,750 14,250 Tax consequences 375 1,500 24. = 375 + 1500 = 1.875 The amount of deferred DTL IS It will be classified as 25. 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. DTL 28. This amount is considered a DTA or Assume enough uncertainty that future income cannot be counted on to occur. How much of the deferred tax asset is realizable? Dhh = 1875 29. 4,275 Determine the balance in the DTA allowance account: Doforred Tax Asset Realizable Value DTA Valuation Allowance 1,875 =2,400 30 4,275 2,400 What will appear in the balance sheet related to the DTA? Deferred Tax Asset DTA Valuation Allowance Net Deferred Tax Asset Deferred Tax Liability Net DTA(DTU) =1,875 -1875 0 31. Valuation Allowance Draw T accounts for the DTL, DTA, and DTA Valuation Allowance Deferred Tax Liability Deferred Tax Asset 1312.50 612.5 562.50 3,662.50 0 2400 1825 4,275 2400 32. 3662.50 Make the journal entry to record taxes. Deferred Tax Asset Valuation Allowance for DTA Deferred Tax Liability Income Tax Benefit 2400 562.50 700 ACC 302 - Deferred Taxes- Activity 4 32. Assume Al of $4,000 for 20x4. The income statement includes an accrual for an $8,000 loss from a lawsuit expected to be settled in 20x6. Calculate the tax loss carryover for 20x3. Accounting Income 4.000 Temporary Difference - due to depreciation (from chart) 2,500 Temporary Difference - due to lawsuit 8,000 =9,500 Taxable income (loss) before special deductions NOL Carryover to 20x4 =-4,750 NOL Carryover to 20x5 -14,250 34. The cumulative temporary difference for depreciation: 20x1 Temporary Difference from Chart) 1,250 20x2 Temporary Difference (from Chart) 2,500 20x3 Tomporary 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 suit is This difference will be associated with future TAXABLE AMOUNTS 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 5000. NOL 8,750 na Tax Rate Na 30%. Carryback NOL Tax 375 1500 Carryover 1,750 14,250 4,750 Consequences Deductible Amounts 1250 2500 305 30% 750 36. The amount of deferred DTL is =375+1500+750 = 2625 37. It will be classified as 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 rate Deferred Tax Asset = 12750 30% 3,825 39. The balance in the allowance account is 40. No evidence to indicate that it is more than likely than not that the DTA will not be realized Make T accounts for the DTL, DTA, and DTA Alowance Accounts. Deferred Tax Liability Deferred Tax Assel__ Valuation Allowance 1875 4275 2400 2400 750 450 2625 3825 41. 2400 Make the journal entry to record taxes. 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. 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. 42. 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 2012 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 in TI in Al (less than) AI Taxable/Deductible Amts Rate 30,000/4 TD=1,250 X.5=3,750 x.5=2,500 Tax 30000/6 404 20x1 2,500 40% 20X2 7,500 5,000 20x3 7,500 5,000 2,500 40% 20x4 7,500 5,000 2,500 35% 20x5 3,750 5,000 1,250 35% 5,000 5,000 35% 20x8 5,000 5,000 35% 20x7 2. 10,000 Taxable income and taxes payable for 20x1: Pretax Accounting Income Temporary Difference Taxable income Tax Rate -1,250 = 8,250 404 Income Tax Payable = 3,500 3. 20x5 4. According to the above chart, the 20x1 temporary difference is $1.250. Reversal of the temporary difference will occur in what year? The reversing differences will be GTAXABLE AMOUNTS DEDUCTIBLE AMOUNTS The deferred tax consequence for the twitemporary unference is a DEFERRED TAX ASSET (DTA) REFERRED TAX LIABILITY (DTL) or 20x5 ACC 302 - Deferred Taxes- Activity 4 Schedule the current and future tax consequences for 20x1. Description 20x1 Description 2012 20x3 20x4 Taxable TA Income 8,750 Tax Rate x 40% Tax Rate 20x6 20x7 1,250 X35% Taxes Payable 3,500 Tax Consequence 437.5 6. The amount of deferred DTL IS $ 437.50 7. LONG TERM It will be classified as SHORT TERM OF Deferred Tax Liability beg 0 Cr to DTL -> 437.50 437.50 end 8. 3,500 Income Tax Expense: Income Tax Payable Increase in Deferred Tax Liability Income Tax Expense 437.50 = 3, 937.50 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 20x22: 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 will be refunded 12 The refund will be a CURRENT ASSET or LONG TERM ASSET 13. 20x2, Cumulative Temporary Difference and year of reversal Amount Year of Reversal 20x1 Temporary Difference (from Chart) 1.250 20x2 Temporary Differenon (from Chart) 2,500 Cumulative Temporary Difference 3,750 14. Schedule the current and future tax consequences for 20x2. For now, ignore the future tax benefit of the NOL carryover. Description 20x1 20x2 Description 20x3 20x4 20x5 20x6 20x7 Tl (loss) 8,750 (10,500) TA 1250 2500 Tax Rate x 40% 35% Tax Rate 35% Taxes 3,500 na Tax Payable consequences 437. 875 50 Carryback 8750 na Tax Rate 40% na 20x2 Tax 3500 Refund na 437.5 + 875 15. The amount of deferred DTL is = 1312.50 16. It will be classified as SHORT TERM or LONG TERM 17. The amount of NOL carryover: 202 NOL (10,500) Amount Carried Back to 20x1 8,750 NOL Carryover to 20x3 = 1,750 18. 1,750 x 356 = 612.50 The future tax consequence of the NOL carryover is Draw T accounts for the DTL and DTA Deferred Tax Asset 19. Deferred Tax Liability 0 437.50 61250 875 612.50 1.312.50 20. 612.50 21. Make the journal entry to record income taxes for 20x2. Income Tax Refund Receivable 3,500 Deferred Tax Asset 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) Taxable Income (loss) before special deductions -12,500 NOL Carryover from 20x2 to 20x3 -1750 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 30% 305 Carryback NOL Carryover 1,750 14,250 Tax consequences 375 1,500 24. = 375 + 1500 = 1.875 The amount of deferred DTL IS It will be classified as 25. 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. DTL 28. This amount is considered a DTA or Assume enough uncertainty that future income cannot be counted on to occur. How much of the deferred tax asset is realizable? Dhh = 1875 29. 4,275 Determine the balance in the DTA allowance account: Doforred Tax Asset Realizable Value DTA Valuation Allowance 1,875 =2,400 30 4,275 2,400 What will appear in the balance sheet related to the DTA? Deferred Tax Asset DTA Valuation Allowance Net Deferred Tax Asset Deferred Tax Liability Net DTA(DTU) =1,875 -1875 0 31. Valuation Allowance Draw T accounts for the DTL, DTA, and DTA Valuation Allowance Deferred Tax Liability Deferred Tax Asset 1312.50 612.5 562.50 3,662.50 0 2400 1825 4,275 2400 32. 3662.50 Make the journal entry to record taxes. Deferred Tax Asset Valuation Allowance for DTA Deferred Tax Liability Income Tax Benefit 2400 562.50 700 ACC 302 - Deferred Taxes- Activity 4 32. Assume Al of $4,000 for 20x4. The income statement includes an accrual for an $8,000 loss from a lawsuit expected to be settled in 20x6. Calculate the tax loss carryover for 20x3. Accounting Income 4.000 Temporary Difference - due to depreciation (from chart) 2,500 Temporary Difference - due to lawsuit 8,000 =9,500 Taxable income (loss) before special deductions NOL Carryover to 20x4 =-4,750 NOL Carryover to 20x5 -14,250 34. The cumulative temporary difference for depreciation: 20x1 Temporary Difference from Chart) 1,250 20x2 Temporary Difference (from Chart) 2,500 20x3 Tomporary 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 suit is This difference will be associated with future TAXABLE AMOUNTS 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 5000. NOL 8,750 na Tax Rate Na 30%. Carryback NOL Tax 375 1500 Carryover 1,750 14,250 4,750 Consequences Deductible Amounts 1250 2500 305 30% 750 36. The amount of deferred DTL is =375+1500+750 = 2625 37. It will be classified as 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 rate Deferred Tax Asset = 12750 30% 3,825 39. The balance in the allowance account is 40. No evidence to indicate that it is more than likely than not that the DTA will not be realized Make T accounts for the DTL, DTA, and DTA Alowance Accounts. Deferred Tax Liability Deferred Tax Assel__ Valuation Allowance 1875 4275 2400 2400 750 450 2625 3825 41. 2400 Make the journal entry to record taxes. 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. 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. 42