Problem 1: California Surplus Inc. qualifies to use the installment-sales method for tax purposes and sold an investment on an installment basis. The total gain of $75000 was reported for financial reporting purposes in the period of sale. The installment period is 3 years; one-third of the sale price is collected in 2012 and the rest in 2013. The tax rate was 35% in 2012, and 30% in 2013 and 30% in 2014. The accounting and tax data is shown below. Financial Accounting Tax Return 2012 (40% tax rate) Income before temporary difference $ 175,000 $ 175,000 Temporary difference $ 75,000 $ 25,000 Income $ 250,000 $ 200,000 Tax Expense 250,000 x 40% Tax Payable 200,000 x 40% $ 100,000 $ 80,000 Deferred $20,000 2013 (35% tax rate) Income before temporary difference $ 200,000 $ 200,000 Temporary difference $ - $ 25,000 Income $ 200,000 $ 225,000 Tax Expense 200,000 x 35% Tax Payable 225,000 x 35% 2014 (35% tax rate) Income before temporary difference $ 180,000 $ 180,000 Temporary difference $ - $ 25,000 Income $ 180,000 $ 205,000 Required: Prepare the journal entries to record the income tax expense, deferred income taxes, and the income taxes payable for 2012, 2013, and 2014. No deferred income taxes existed at the beginning of 2012. Income tax expense 250,000 x 40% =100,000 Income tax Payable 200,000 x 40% = 80,000 Deferred Tax Liability Current 2012 25,000 x 40% =10,000 2013 25,000 x 35%= 8,750 2014 25,000 x 35% = 8,750 Deferred Tax Liability Current Deferred Tax Liability Noncurrent 17,500 Enacted Tax Rates 2012 25,000 x 35%=8,750 2013 25,000 x 30%=7,500 2013 25,000 x 30%=7,500 Deferred Liability noncurrent 15,000 Adjustment Deferred tax benefit 2,500 Journal Entry 2012 Dr. Income Tax Expense 100,000 Cr. Income Tax Payable 80,000 2) Explain how the deferred taxes will appear on the balance sheet at the end of each year. (Assume Installment Accounts Receivable is classified as a current asset.) On the Balance Sheet the $,000 is listed as Current Income Tax Liability, and the is listed as Noncurrent Tax Liability 3) Show the income tax expense section of the income statement for each year, beginning with ?Income before income taxes.?

Homework - Week 2 - Chapter 19 Problem 1: California Surplus Inc. qualifies to use the installmentsales method for tax purposes and sold an investment on an installment basis. The total gain of $75000 was reported for financial reporting purposes in the period of sale. The installment period is 3 years; one-third of the sale price is collected in 2012 and the rest in 2013. The tax rate was 35% in 2012, and 30% in 2013 and 30% in 2014. The accounting and tax data is shown below. Financial Accounting Tax Return Income before temporary difference $ 175,000 $ 175,000 Temporary difference $ 75,000 $ 25,000 Income $ 250,000 $ 200,000 2012 (40% tax rate) Homework - Week 2 - Chapter 19 Tax Expense 250,000 x 40% Tax Payable 200,000 x 40% $ 100,000 $ 80,000 Income before temporary difference $ 200,000 $ 200,000 Temporary difference $ $ 25,000 $ 200,000 $ 225,000 Income before temporary difference $ 180,000 $ 180,000 Temporary difference $ $ 25,000 Income $ 180,000 $ 205,000 Deferred $20,000 2013 (35% tax rate) Income Tax Expense 200,000 x 35% Tax Payable 225,000 x 35% - 2014 (35% tax rate) Required: - Homework - Week 2 - Chapter 19 Prepare the journal entries to record the income tax expense, deferred income taxes, and the income taxes payable for 2012, 2013, and 2014. No deferred income taxes existed at the beginning of 2012. Income tax expense 250,000 x 40% =100,000 Income tax Payable 200,000 x 40% = 80,000 Deferred Tax Liability Current 2012 25,000 x 40% =10,000 2013 25,000 x 35%= 8,750 2014 25,000 x 35% = 8,750 Deferred Tax Liability Current Deferred Tax Liability Noncurrent 17,500 Enacted Tax Rates 2012 25,000 x 35%=8,750 2013 25,000 x 30%=7,500 2013 25,000 x 30%=7,500 Deferred Liability noncurrent 15,000 Adjustment Deferred tax benefit 2,500 Journal Entry 2012 Dr. Income Tax Expense 100,000 Cr. Income Tax Payable 80,000 2 ) Explain how the deferred taxes will appear on the balance sheet at the end of each year. (Assume Installment Accounts Receivable is classified as a current asset.) On the Balance Sheet the $,000 is listed as Current Income Tax Liability, and the is listed as Noncurrent Tax Liability 3 ) Show the income tax expense section of the income statement for each year, beginning with \"Income before income taxes.\" Part a) GAAP Reporting 2012 2013 2014 Total 250,000 200,000 180,000 =70,000 (difference) 40% 35% 35% $ 100,000 70,000 63,000 233,500 Tax Reporting 2012 2013 2014 Total 200,000 225,000 205,000 30,000 (difference) 40% 35% 35% $ 80,000 78,750 71,750 230,500 Income Tax Expense &Income Tax Payable 2012 2013 2014 Total $ 100,000 70,000 63,000 233,000 $ 80,000 78,750 71,750 230,500 20,000 (8,750) (8,750) 2,500 Pretax Financial Income Income Tax Rate Income Tax Expense Taxable Income Income Tax Rate Income Tax Payable Income Tax Expense Income Tax Payable Differences Homework - Week 2 - Chapter 19 Problem 2: The Ambrosi a Corpora tion's lead account ant shows the followin g info: On Jan 1, 2012, Ambrosi a purchas ed a bottling machine for $800000 A) Straight -line basis depreci ation for 5 years for tax purpose s B) Half year convent ion for 8 years for financial reportin g (See Appendi x 11A.) C) Taxexempt municip al bonds yielded interest of Homework - Week 2 - Chapter 19 $150000 in 2013. D) Pretax financial income is $230000 0 in 2012 and $240000 0 in 2013. E) The compan y recogni zed an extraord inary gain of $150000 in 2013 (which is fully taxable). F) Taxable income is expecte d in future years with an expecte d tax rate of 35%. Require d: 1) 2) Comput e taxable income and income taxes payable for 2013. Prepare the journal entries for income tax expense, income taxes payable, and deferred taxes for 2013. Homework - Week 2 - Chapter 19 3) Prepare the deferred income taxes present ation for Dec 31, 2013 balance sheet