COMPREHENSIVE PROBLEM 4 - DEFERRED TAXESNOTES:Providing (well labeled & well organized) computations, schedules, etc. wi...
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COMPREHENSIVE PROBLEM 4 - DEFERRED TAXES
NOTES:
Providing (well labeled & well organized) computations, schedules, etc. will maximize
partial credit for incorrect answers.
Solution is posted in the course space 24 hours after problem due date - problems will not
be accepted for credit once the solution is posted.
Jones Co. began operations on January 1, 2013, at which time they purchased an asset for
$200,000. The asset had an expected useful life of 4 years and a salvage value of $0. Enacted
income tax rates for Jones are 32% for 2013 & 2014 and 34% for all years afterwards.
Below is information regarding Jonesâ financial income (loss) for 2013 and 2014, along with
information regarding differences between financial and taxable income for those years.
2013
Financial loss before taxes was $50,000.
Jones depreciates the asset (above) the MACRS method (3 year life classification), for
tax purposes & 4 year expected life for financial reporting purposes. A depreciation
schedule over the life of the asset is as follows:
Tax expense
Financial reporting expense
2013
$66,660
$50,000
2014
$88,900
$50,000
2015
$29,620
$50,000
2016
$14,820
$50,000
On October 1, 2013, Jones collected $12,000 rent ($1,000 per month), in advance, on its
excess office space (i.e. Jones is the landlord, renting out some space that the company is
not currently using), crediting Unearned Rent for the $12,000.
Jones sells a product that carries a two year warranty. During 2009 estimated warranty
expense was $20,000 and cash outlays to repair products under warranty were $7,000.
The remaining $13,000 of warranty work is expected to occur in 2010.
Interest earned on tax free municipal bonds was $4,000.
2014
Financial income before taxes $175,000.
Jones earned the remainder of the $12,000 prepaid rent collected in 2013 and, when the
lease was up on October 1, 2014, the tenant moved out & the space was no longer rented.
Jones incurred the remaining $13,000 in warranty costs as estimated in 2013 from the
2013 sales. With regard to 2014; warranty expense was estimated to be $25,000 and cash
outlays were $10,000 (the remaining $15,000 from the 2014 estimate is expected to occur
in 2015).
Additionally:
Whenever possible, Jones carries taxable net operating losses back. Losses carried forward are
expected to reverse in the following fiscal year.
REQUIREMENTS
1)
Compute taxable income (loss) for 2013 and 2014.
( 4 points)
2)
Prepare journal entries to record 2013 and 2014 tax expense (benefit). (Hint: It will be
helpful if you use separate accounts for each deferred tax asset and/or deferred tax
liability.
(12 points)
3)
Present the amounts and classification of the deferred tax items on the 2013 and 2014
balance sheets (Hint: remember, there can be no more than ONE net current deferred tax
account and ONE net long term deferred tax account)
( 4 points)
Check Figures:
Taxable Loss 2013 = ($40,660); Taxable Income 2014 = $129,100
Income Tax Expense/Benefit:
2013 â Benefit due to loss carryforward = $13,011 & Income Tax Benefit related to the
other book/tax differences = $1,376.
2014 - Income Tax Expense = $56,478 (and Income Tax Payable = $28,301)
NOTES:
Providing (well labeled & well organized) computations, schedules, etc. will maximize
partial credit for incorrect answers.
Solution is posted in the course space 24 hours after problem due date - problems will not
be accepted for credit once the solution is posted.
Jones Co. began operations on January 1, 2013, at which time they purchased an asset for
$200,000. The asset had an expected useful life of 4 years and a salvage value of $0. Enacted
income tax rates for Jones are 32% for 2013 & 2014 and 34% for all years afterwards.
Below is information regarding Jonesâ financial income (loss) for 2013 and 2014, along with
information regarding differences between financial and taxable income for those years.
2013
Financial loss before taxes was $50,000.
Jones depreciates the asset (above) the MACRS method (3 year life classification), for
tax purposes & 4 year expected life for financial reporting purposes. A depreciation
schedule over the life of the asset is as follows:
Tax expense
Financial reporting expense
2013
$66,660
$50,000
2014
$88,900
$50,000
2015
$29,620
$50,000
2016
$14,820
$50,000
On October 1, 2013, Jones collected $12,000 rent ($1,000 per month), in advance, on its
excess office space (i.e. Jones is the landlord, renting out some space that the company is
not currently using), crediting Unearned Rent for the $12,000.
Jones sells a product that carries a two year warranty. During 2009 estimated warranty
expense was $20,000 and cash outlays to repair products under warranty were $7,000.
The remaining $13,000 of warranty work is expected to occur in 2010.
Interest earned on tax free municipal bonds was $4,000.
2014
Financial income before taxes $175,000.
Jones earned the remainder of the $12,000 prepaid rent collected in 2013 and, when the
lease was up on October 1, 2014, the tenant moved out & the space was no longer rented.
Jones incurred the remaining $13,000 in warranty costs as estimated in 2013 from the
2013 sales. With regard to 2014; warranty expense was estimated to be $25,000 and cash
outlays were $10,000 (the remaining $15,000 from the 2014 estimate is expected to occur
in 2015).
Additionally:
Whenever possible, Jones carries taxable net operating losses back. Losses carried forward are
expected to reverse in the following fiscal year.
REQUIREMENTS
1)
Compute taxable income (loss) for 2013 and 2014.
( 4 points)
2)
Prepare journal entries to record 2013 and 2014 tax expense (benefit). (Hint: It will be
helpful if you use separate accounts for each deferred tax asset and/or deferred tax
liability.
(12 points)
3)
Present the amounts and classification of the deferred tax items on the 2013 and 2014
balance sheets (Hint: remember, there can be no more than ONE net current deferred tax
account and ONE net long term deferred tax account)
( 4 points)
Check Figures:
Taxable Loss 2013 = ($40,660); Taxable Income 2014 = $129,100
Income Tax Expense/Benefit:
2013 â Benefit due to loss carryforward = $13,011 & Income Tax Benefit related to the
other book/tax differences = $1,376.
2014 - Income Tax Expense = $56,478 (and Income Tax Payable = $28,301)
