Bakersfield College

ACG 2021

1)Gallo Light began operations in 2016. The company sometimes sells used warehouses on an installment basis. In those cases, Gallo Light reports income in its income statement in the year of the sale. In its income tax return, though, Gallo Light reports installment income by the installment method. Installment income in 2016 was $90,000, which Gallo Light expects to collect equally over the next three years. The tax rate is 30%, but based on an enacted law, is scheduled to become 35% in 2018.

Gallo Light's pretax accounting income from the 2016 income statement was $830,000, which includes $40,000 of interest revenue from an investment in municipal bonds. There were no differences between accounting income and taxable income other than those described above.

Required:

(1.)                 Prepare the appropriate journal entry to record Gallo Light's 2016 income taxes.

Show calculations.

(2.)                 What is Gallo Light's 2016 net income?

2. EZ, Inc., reports pretax accounting income of $400,000, but due to a single temporary difference, taxable income is $500,000. At the beginning of the year, no temporary differences existed. EZ is subject to a tax rate of 40%.

Required:

Prepare the appropriate journal entry to record EZ's income taxes. Show well-labeled computations.

3. In the current year, Bruno Corporation collected rent of $3,600,000. For income tax reporting, the rent is taxed when collected. For financial reporting, the rent is recognized as income in the period earned. At the end of the current year, the unearned portion of the rent collected in the current year amounted to $400,000. Bruno had no temporary differences at the beginning of the current year. Assume an income tax rate of 30%.

Required:

The current year's income tax liability from the tax return is $800,000. Prepare the journal entry to record income taxes for the year. Show well-labeled computations.

4. At the end of its first year of operations, Prince Charming Corporation had a current liability of

$300,000 for unearned rent. This was the only difference between pretax accounting income and taxable income. Assume an income tax rate of 40%.

Required:

The tax liability from the tax return is $750,000. Prepare the journal entry to record income taxes for Prince Charming's first year of operations. Show well-labeled computations.

5. Pocus, Inc., reports warranty expense when related products are sold. For tax purposes, the warranty costs are deductible as incurred. At the end of the current year, Pocus has a warranty liability of $200,000 and taxable income of $20,000,000. At the end of the previous year, Pocus reported a deferred tax asset of $80,000 related to the difference in reporting warranty expense, its only temporary difference. The enacted tax rate is 30% each year.

Required:

Prepare the appropriate journal entry for Pocus to record the income tax provision for the current year. Show well-labeled supporting computations.

6. Pocus Inc. reports warranty expense when related products are sold. For tax purposes, the

warranty costs are deductible as incurred. At the end of the current year, Pocus has a warranty liability of $500,000 and taxable income of $50,000,000. At the beginning of the current year, Pocus reported a deferred tax asset of $210,000 related to the difference in reporting warranty expense, its only temporary difference. The enacted tax rate is 40% each year.

Required:

Prepare the appropriate journal entry for Pocus to record the income tax provision for the current year. Show well-labeled computations to support the three amounts in your journal entry.

7. Gore Company, organized on January 2, 2016, had pretax accounting income of $7,000,000 and taxable income of $10,000,000 for the year ended December 31, 2016. The 2016 tax rate was 40%. The only difference between book and taxable income is estimated warranty costs. Expected payments and scheduled enacted tax rates are as follows:

Required:

Prepare one compound journal entry to record Gore's provision for taxes for the year 2016.

Use the following to answer questions:

In LMC's 2016 annual report to shareholders, it disclosed the following information about its income taxes:

INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets and liabilities for accounting purposes and the amounts used for income tax purposes.

Significant components of the Company's deferred tax liabilities and assets as of December 31 were as follows:

($ in millions)                                        2016                 2015

Deferred tax liabilities:

Deferred tax assets:

Alternative minimum tax credit                            154.7                155.3

carryforwards

8. Explain why LMC has a $209.4 million valuation allowance for its deferred tax assets.

9. Will LMC report $819.9 million as a liability in its balance sheet at December 31, 2016? Explain.

10. Indicate why LMC lists net operating loss carryforwards as a component of deferred tax assets.

11. At the end of the preceding year, World Industries had a deferred tax asset of $17,500,000, attributable to its only temporary difference of $50,000,000 for estimated expenses. At the end of the current year, the temporary difference is $45,000,000. At the beginning of the year there was no valuation account for the deferred tax asset. At year-end, World Industries now estimates that

it is more likely than not that one-third of the deferred tax asset will never be realized. Taxable income is $12,000,000 for the current year and the tax rate is 30% for all years.

Required:

Prepare journal entries to record World Industries' income tax expense for the current year. Show well-labeled supporting computations for each component of the journal entries.

12. At the end of the prior year, Doubtful Inc. had a deferred tax asset of $20,000,000 attributable to its only timing difference, a temporary difference of $50,000,000 in a liability for estimated expenses. At that time, a valuation allowance of $4,000,000 was established. At the end of the current year, the temporary difference is $45,000,000, and Doubtful determines that the balance in the valuation account should now be $5,000,000. Taxable income is $15,000,000 and the tax rate is 40% for all years.

Required:

Prepare journal entries to record Doubtful's income tax expense for the current year. Show well- labeled supporting computations for the income tax payable, the valuation allowance, and the change in the deferred tax asset account.

                                                                                                           1,000,000

13. The following information is for James Industries' first year of operations. Amounts are in millions of dollars.

Year

Future Taxable Amounts

Future Amounts

2015               2016       2017      2018       2019          Total

In 2016 the company's pretax accounting income was $67. The enacted tax rate for 2015 and 2016 is 40%, and it is 35% for years after 2016.

Required:

Prepare a journal entry to record the income tax expense for the year 2016. Show well-labeled computations for income tax payable and the change in the deferred tax account.

Use the following to answer:

Typical Corp. reported a deferred tax liability of $6,000,000 for the year ended December 31, 2015, when the tax rate was 40%. The deferred tax liability was related to a temporary difference of $15,000,000 caused by an installment sale in 2015. The temporary difference is expected to reverse in 2017 when the income deferred from taxation will become taxable. There are no other temporary differences. Assume a new tax law passed in 2016 and the tax rate, which will remain at 40% through December 31, 2016, will become 48% for tax years beginning after December 31, 2016. Pretax accounting income and taxable income for the year 2016 is $30,000,000.

14. Required:

Prepare a compound journal entry to record Typical's income tax expense for the year 2016. Show well-labeled computations.

                                                                                                                12,000,000

15. Prepare two disclosure notes for Typical's year 2016 financial statements to: