(a) To complete a reconciliation of pretax financial income and taxable income, solving for the amount of pretax financial income, we must first determine the amount of temporary differences arising or reversing during the year. To accomplish that, we must determine the amount of cumulative temporary differences underlying the beginning balances of the deferred tax liability of $60,000 and the deferred tax asset of $20,000. $60,000 = 40% = $150,000 beginning cumulative temporary difference. $20,000 = 40% = $50,000 beginning cumulative temporary difference. Cumulative temporary difference at 12/31/19 which will result in future taxable amounts $210,000 Cumulative temporary difference at 1/1/19 which will result in future taxable amounts (150,000) Originating difference in 2019 which will result in future taxable amounts $ 60,000 Cumulative temporary difference at 12/31/19 which will result in future deductible amounts $ 95,000 Cumulative temporary difference at 1/1/19 which will result in future deductible amounts (50,000) Originating difference in 2019 which will result in future deductible amounts S 45,000 EXERCISE 19.12 (Continued) EXERCISE 19.12 (Continued) Pretax financial income $ X Originating difference which will result in future taxable amounts (60,000) Originating difference which will result in future deductible amounts 45,000 Taxable income for 2019 $115,000 Solving for pretax financial income: X - $60,000+ $45,000 = $115,000 X = $130,000 = Pretax financial income (b) Income Tax Expense 52,000 Deferred Tax Asset 18,000 Income Taxes Payable ($115,000 X 40%) 46,000 Deferred Tax Liability 24,000 Temporary Difference Future Taxable (Deductible) Amounts S210,000 195.000) S115.000 Tax Rate Deferred Tax (Asset) Liability 40% $84,000 40% $(38.000) S(38.000) $84.000 Item one Item two Totals *Because of a flat tax rate, these totals can now be reconciled: $115,000 X 40% = $(38,000) + $84,000. Deferred tax liability at the end of 2019 84,000 Deferred tax liability at the beginning of 2019 (60.000) Deferred tax expense for 2019 (net increase required in deferred tax liability) S 24.000 Deferred tax asset at the end of 2019 38,000 Deferred tax asset at the beginning of 2019 20,000 Deferred tax benefit for 2019 (net increase *Because of a flat tax rate, these totals can now be reconciled: $115,000 X 40% = S(38,000) + $84,000. Deferred tax liability at the end of 2019 $ 84,000 Deferred tax liability at the beginning of 2019 _(60,000) Deferred tax expense for 2019 (net increase required in deferred tax liability) $ 24,000 Deferred tax asset at the end of 2019 s 38,000 Deferred tax asset at the beginning of 2019 20,000 Deferred tax benefit for 2019 (net increase required in deferred tax asset) S 18.000 Deferred tax expense for 2019 $ 24,000 Deferred tax benefit for 2019 _(18,000) Net deferred tax expense (benefit) for 2019 6,000 Current tax expense for 2019 (Income taxes payable) __46,000 Income tax expense for 2019 $ 52.000 EXERCISE 19.12 (Continued) (c) Income before income taxes $130,000 Income tax expense Current $46,000 Deferred 6.000 52,000 Net income $ 78,000 (d) Because of the same tax rate for all years involved and no permanent differences, the effective rate should equal the statutory rate. The following calculation proves that it does: $52,000 = $130,000 = 40% effective tax rate for 2019. Beg 2022 DTA 150.000 50.000 200,000 375,000 125,000 150000 50000 300,000 200.000 2023 pretax income 725.000 125.000 Taxable income 850,000 WDTA is expected to be realized at the end of 2022, and taxable income in 2023 was 700,000 (sume that the DTA is severned entirly in 2003) 2022 2033 income tax expense 290,000 income tax cp DTA 50.000 Current 340.000 income tax payable 340000 Deferred 290.000 770,000 2003 2023 income tax expenes income tax expense 480,000 480,000 DTA income tax payable 200.000 28000 280,000 200,000 Deferred if 30,000 of DTA are not expected to be realized at the end of 2022, and the taxable income in 2023 28 700.000 (assume that the DTA is revered entity in 2023) income tax pense Current Deferred 320,000 -20.000 3-40,000 Beg 150,000+50,000 200.000 170,000 770,000 during 2022 150,000 2021 income tax e pene Current Deferred 450,000 280,000 200.000 -30,000 income tax expense DTA 2022 320.000 20,000 income tax payable 340.000 2023 DTA 30,000 income tax expense 30,000 Income tax expertise 480.000 DTA 200.000 Income tax payable 280.000 2022, we expected that only 130,000 of DTA will be realized, 2023 axable income 200,000 and the DTA is realized (a) To complete a reconciliation of pretax financial income and taxable income, solving for the amount of pretax financial income, we must first determine the amount of temporary differences arising or reversing during the year. To accomplish that, we must determine the amount of cumulative temporary differences underlying the beginning balances of the deferred tax liability of $60,000 and the deferred tax asset of $20,000. $60,000 = 40% = $150,000 beginning cumulative temporary difference. $20,000 = 40% = $50,000 beginning cumulative temporary difference. Cumulative temporary difference at 12/31/19 which will result in future taxable amounts $210,000 Cumulative temporary difference at 1/1/19 which will result in future taxable amounts (150,000) Originating difference in 2019 which will result in future taxable amounts $ 60,000 Cumulative temporary difference at 12/31/19 which will result in future deductible amounts $ 95,000 Cumulative temporary difference at 1/1/19 which will result in future deductible amounts (50,000) Originating difference in 2019 which will result in future deductible amounts S 45,000 EXERCISE 19.12 (Continued) EXERCISE 19.12 (Continued) Pretax financial income $ X Originating difference which will result in future taxable amounts (60,000) Originating difference which will result in future deductible amounts 45,000 Taxable income for 2019 $115,000 Solving for pretax financial income: X - $60,000+ $45,000 = $115,000 X = $130,000 = Pretax financial income (b) Income Tax Expense 52,000 Deferred Tax Asset 18,000 Income Taxes Payable ($115,000 X 40%) 46,000 Deferred Tax Liability 24,000 Temporary Difference Future Taxable (Deductible) Amounts S210,000 195.000) S115.000 Tax Rate Deferred Tax (Asset) Liability 40% $84,000 40% $(38.000) S(38.000) $84.000 Item one Item two Totals *Because of a flat tax rate, these totals can now be reconciled: $115,000 X 40% = $(38,000) + $84,000. Deferred tax liability at the end of 2019 84,000 Deferred tax liability at the beginning of 2019 (60.000) Deferred tax expense for 2019 (net increase required in deferred tax liability) S 24.000 Deferred tax asset at the end of 2019 38,000 Deferred tax asset at the beginning of 2019 20,000 Deferred tax benefit for 2019 (net increase *Because of a flat tax rate, these totals can now be reconciled: $115,000 X 40% = S(38,000) + $84,000. Deferred tax liability at the end of 2019 $ 84,000 Deferred tax liability at the beginning of 2019 _(60,000) Deferred tax expense for 2019 (net increase required in deferred tax liability) $ 24,000 Deferred tax asset at the end of 2019 s 38,000 Deferred tax asset at the beginning of 2019 20,000 Deferred tax benefit for 2019 (net increase required in deferred tax asset) S 18.000 Deferred tax expense for 2019 $ 24,000 Deferred tax benefit for 2019 _(18,000) Net deferred tax expense (benefit) for 2019 6,000 Current tax expense for 2019 (Income taxes payable) __46,000 Income tax expense for 2019 $ 52.000 EXERCISE 19.12 (Continued) (c) Income before income taxes $130,000 Income tax expense Current $46,000 Deferred 6.000 52,000 Net income $ 78,000 (d) Because of the same tax rate for all years involved and no permanent differences, the effective rate should equal the statutory rate. The following calculation proves that it does: $52,000 = $130,000 = 40% effective tax rate for 2019. Beg 2022 DTA 150.000 50.000 200,000 375,000 125,000 150000 50000 300,000 200.000 2023 pretax income 725.000 125.000 Taxable income 850,000 WDTA is expected to be realized at the end of 2022, and taxable income in 2023 was 700,000 (sume that the DTA is severned entirly in 2003) 2022 2033 income tax expense 290,000 income tax cp DTA 50.000 Current 340.000 income tax payable 340000 Deferred 290.000 770,000 2003 2023 income tax expenes income tax expense 480,000 480,000 DTA income tax payable 200.000 28000 280,000 200,000 Deferred if 30,000 of DTA are not expected to be realized at the end of 2022, and the taxable income in 2023 28 700.000 (assume that the DTA is revered entity in 2023) income tax pense Current Deferred 320,000 -20.000 3-40,000 Beg 150,000+50,000 200.000 170,000 770,000 during 2022 150,000 2021 income tax e pene Current Deferred 450,000 280,000 200.000 -30,000 income tax expense DTA 2022 320.000 20,000 income tax payable 340.000 2023 DTA 30,000 income tax expense 30,000 Income tax expertise 480.000 DTA 200.000 Income tax payable 280.000 2022, we expected that only 130,000 of DTA will be realized, 2023 axable income 200,000 and the DTA is realized