You are the new accounting manager at the Barry Transport Company. Your CFO has
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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:
Pretax accounting income was $70 million and taxable income was $8 million for the year ended December 31, 2016.
Tax depreciation exceeds book depreciation by $60 million in 2016 for the business complex acquired that year. This amount is scheduled to be $80 million in 2017 and to reverse as ($70 million) and ($70 million) in 2018, and 2019, respectively.
Determine the amounts necessary to record income taxes for 2016 and prepare the appropriate journal entry.
2. How should the deferred tax amounts be classified in a classified balance sheet?
Assume the enacted federal income tax law specifies that the tax rate will change from 40% to 35% in 2018. 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 2017 before reversing the next two years. Upon consulting PricewaterhouseCoopers' Comperio database, you found:
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 that, 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.
3. Determine the amounts necessary to record income taxes for 2016 and prepare the appropriate journal entry.
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:
Explanation / Answer
Answer
Answer 1
Determine the amounts necessary to record income taxes for 2016 and prepare the appropriate journal entry.
1. Current income tax expense A/c dr. $3.2 million ($8 million*40%)
To income tax payable A/c Cr. $3.2 million
2. Deferred tax Expense (depreciation) A/c Dr. $ 24 million ($ 60 million * 40%)
Deferred tax Expense (Insurance) A/c Dr. $ 3.2 million ($ 8 million * 40%)
To Deferred Tax liabilities A/c Cr. $ 27.2 million
3. Deferred tax liability A/c Dr. $2.4 million ($6 million*40%)
To Deferred tax expense (Contingency loss) A/c Cr. $ 2.4 million
4. Profit and loss A/c Dr. $ 28 million
Deferred tax expense (Contingency loss) A/c dr. $ 2.4 million
To Current income tax expense A/c Cr. $3.2 million
To Deferred tax Expense (depreciation) A/c Cr. $ 24 million
To Deferred tax Expense (Insurance) A/c Cr. $ 3.2 million
Answer 2
How should the deferred tax amounts be classified in a classified balance sheet?
Barry Transport Company should show net amount of $ 24.8 million ($ 24 million + $ 3.2 million - $ 2.4 million) as deferred tax expense in profit and loss account and $ 24.8 million as differed tax liabilities on liability side of balance sheet.
Answer 3
Notes
Assume the enacted federal income tax law specifies that the tax rate will change from 40% to 35% in 2018.
Tax depreciation is scheduled to be $80 million in 2017. This future matter will not considered while determining deferred tax amount.
The Tax depreciation to reverse as ($70 million) and ($70 million) in 2018, and 2019, respectively. A $6 million loss contingency was accrued in 2016, to be paid in 2018. So 35% tax rate will be used to determine deferred tax for depreciation and contingency loss.
Insurance of $8 million was paid in 2016 for 2017 coverage. So 40% tax rate will be used to determine deferred tax for Insurance.
1. Current income tax expense A/c dr. $3.2 million ($8 million*40%)
To income tax payable A/c Cr. $3.2 million
2. Deferred tax Expense (depreciation) A/c Dr. $ 21 million ($ 60 million * 35%)
Deferred tax Expense (Insurance) A/c Dr. $ 3.2 million ($ 8 million * 40%)
To Deferred Tax liabilities A/c Cr. $ 24.2 million
3. Deferred tax liability A/c Dr. $ 2.1 million ($6 million*35%)
To Deferred tax expense (Contingency loss) A/c Cr. $ 2.1 million
4. Profit and loss A/c Dr. $ 25.3 million
Deferred tax expense (Contingency loss) A/c dr. $ 2.1 million
To Current income tax expense A/c Cr. $3.2 million
To Deferred tax Expense (depreciation) A/c Cr. $ 21 million
To Deferred tax Expense (Insurance) A/c Cr. $ 3.2 million
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