Question

You are the new accounting manager at the Barry Transport Company. Your CFO has asked you to provide input on the company's income tax position based on the following: 1. Pretax accounting income was $60 million and taxable income was $16 million for the year ended December 31, 2021. 2. The difference was due to three items: a. Tax depreciation exceeds book depreciation by $40 million in 2021 for the business complex acquired that year. This amount is scheduled to be $60 million in 2022 and to reverse as ($50 million) and ($50 million) in 2023 and 2024, respectively. b. Insurance of $12 million was paid in 2021 for 2022 coverage. C. A $8 million loss contingency was accrued in 2021, to be paid in 2023. 3. No temporary differences existed at the beginning of 2021. 4. The tax rate is 25%. Required: 1. Determine the amounts necessary to record income taxes for 2021, and prepare the appropriate journal entry. 2. Assume the enacted federal income tax law specifies that the tax rate will change from 25% to 20% in 2023. When scheduling the reversal of the depreciation difference, you were uncertain as to how to deal with the fact that the difference will continue to originate in 2022 before reversing the next two years. Upon consulting PricewaterhouseCoopers' Comperio database, you found: .441 Depreciable and amortizable assets Only the reversals of the temporary difference at the balance sheet date would be scheduled. Future originations are not considered in determining the reversal pattern of temporary differences for depreciable assets. FAS 109 (FASB ASC 740-Income Taxes) is silent as to how the balance sheet date temporary differences are deemed to reverse, but the FIFO pattern is intended. You interpret that to mean, when future taxable amounts are being scheduled, and a portion of a temporary difference has yet to originate, only the reversals of the temporary difference at the balance sheet date can be scheduled and multiplied by the tax rate that will be in effect when the difference reverses. Future originations (like the depreciation difference the second year) are not considered when determining the timing of the reversal. For the existing temporary difference, it is assumed that the difference will reverse the first year the difference begins reversing. Determine the amounts necessary to record income taxes for 2021, and prepare the appropriate journal entry.

Answer 1

D E F G 1 1) 3 Event Debit Credit 15 i ooo vaut wn General Journal 1 Income tax expense Deferred tax asset Deferred tax liability Income tax payable Current Year Deferred tax Liability Asset Future Taxable (Deductible) 2016 Amounts 2017 60 2018 11 12 13 14 Pretax accounting Income 15 Temporary differences: 16 Depreciation 17 Prepaid insurance 2019 401 -40 -121 12 25% 18 20% 8 3 11 20% -1.6 1.61 19 Deferred tax laibility 20 Loss contingency 21 22 Deferred tax asset 23 Taxable income(income tax return) 24 Enacted tax rate 25 tax payable currently 26 Ending balances(balances currently needed) 27 Less:beginning balances 28 change needed to achieve desired balances 161 25% 4 $11.00 0 $11.00 $1.60 0 $1.60

0 11 111 30 Deferred tax asset Deferred tax liability 31 0 32 1.6 33 1.6 34 35 Event General Journal 36 1 Income tax expense(to balance) 37 Deferred tax asset(determined above) 38 Deferrred tax liability(determined above) Income tax payable(determined above) Debit Credit 13.4 1.6 39

co F 1 1) 2 3 Event Credit Debit =60*25% ocou w General Journal Income tax expense Deferred tax asset Deferred tax liability Income tax payable =C4+C5-D7 =16*25% 9 2) 10 Current Year 2016 Deferred tax Liability Asset 11 Future Taxable (Deductible) Amounts 2017 2018 2019 60 40 -40 -12 12 0.2 0.25 =C17*C18 -D16*D18 =C19+D19 12 13 14 Pretax accounting Income 15 Temporary differences: 16 Depreciation 17 Prepaid insurance 18 19 Deferred tax laibility 20 Loss contingency 21 22 Deferred tax asset 23 Taxable income(income tax return) 24 Enacted tax rate 25 tax payable currently 26 Ending balances(balances currently needed) 27 Less:beginning balances 28 change needed to achieve desired balances 8 -8 0.2 =D20*D21 1.6 16 0.25 =B23*B24 I 1.6 lolo 11 1.6

30 Deferred tax asset Deferred tax liability 31 O 10 32 1.6 11 33 1.6 11 34 Credit 35 Event 36 1 37 38 39 General Journal Income tax expense(to balance) Deferred tax asset(determined above) Deferrred tax liability(determined above) Income tax payable(determined above) Debit =D39+D38-C37 1.6