Question

(Two Differences, No Beginning Deferred Taxes, Multiple Rates) Teri Hatcher Inc., in its first year of oper- ations, has the following differences between the book basis and tax basis of its assets and liabilities at the end of 2016.

Book Basis

Equipment (net) $400,000 Estimated warranty liability $200,000

Tax Basis

$340,000 $ –0–

It is estimated that the warranty liability will be settled in 2017. The difference in equipment (net) will result in taxable amounts of $20,000 in 2017, $30,000 in 2018, and $10,000 in 2019. The company has taxable income of $520,000 in 2016. As of the beginning of 2016, the enacted tax rate is 34% for 2016–2018, and 30% for 2019. Hatcher expects to report taxable income through 2019.

1100 Chapter 19 Accounting for Income Taxes

Instructions

1. (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016.

2. (b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2016.

Answer 1

Teri Hatcher Inc. Requirement a Dr. 68000 Income Tax Expense a/c Deferred Tax Asset a/c To Income Taxes Payable To Deferred Tax Liability 176800 20000 Future Years 2018 2017 2019 Total 30000 10000 60000 -200000 Future taxable (deductible) amounts Depreciation Warranty costs Enacted tax rate Deferred tax liability Deferred tax (asset) 20000 -200000 34% 6800 -68000 34% 10200 30% 3000 20000 -68000 Taxable income for 2016 Tax rate Income taxes payable for 2016 520000 34% 176800 20000 Deferred tax liability at the end of 2016 Deferred tax liability at the beginning of 2016 Deferred tax expense for 2016 (increase required in deferred tax liability account) 20000 68000 Deferred tax asset at the end of 2016 Deferred tax asset at the beginning of 2016 Deferred tax benefit for 2016 (increase in deferred tax asset) -68000 Deferred tax benefit for 2016 Deferred tax expense for 2016 Net deferred tax benefit for 2016 Current tax expense for 2016 Income tax expense for 2016 -68000 20000 -48000 176800 128800 Requirement b Non-current assets Deferred tax asset ($68,000 - $20,000) 48000