Question

Part 2: Scheduling of Deferred Taxes

From the information below, prepare Excel schedules (similar to those on pages 13 and 14 of the chapter notes) for 2015 and 2016 to calculate deferred income taxes. Remember, when preparing the 2015 schedule, you do not know about any changes that come about in 2016 (i.e., prepare the 2015 schedule with 2015 information only). Given the following information for Company Z for 2015 (in its first year of calculating deferred income taxes):

1)   Company Z has one depreciable asset purchased January 2, 2015. The cost of the asset was $50,000. For financial statement purposes, Company Z is depreciating this asset over 10 years with no salvage value. For tax purposes Company Z is using MACRS, and the asset qualifies as a 5 year asset. Company Z has scheduled out the annual depreciation difference as follows:

                                  Straight-line    MACRS

            Year                (for financial)   (for tax)                    Difference

            2015                   $5,000          $ 10,000                      (5,000)

            2016                     5,000             16,000                    (11,000)

            2017                     5,000               9,600                      (4,600)

            2018                     5,000               5,760                         (760)

            2019                     5,000               5,760                         (760)

            2020                     5,000               2,880                      2,120

            2021                     5,000                  -0-                       5,000

            2022                     5,000                  -0-                       5,000

            2023                     5,000                  -0-                       5,000

            2024                     5,000                  -0-                        5,000

2) The company recognized $18,000 for income from its equity method investment in 2015, but received only $12,000 in dividends from this investment (and recognized $12,000 in dividend income for tax purposes).

3)   During 2015, Company Z recorded $14,000 as unearned subscription revenue, and plans to deliver the subscriptions in 2016. The IRS rules require that this amount be recognized as revenue in 2015.

4) The company also recognized estimated warranty expense of $6,000 in 2015. The warranties are expected to be paid out in 2017.

5) Pretax financial income was $200,000 in 2015, and a tax rate of 30 percent was enacted for the current and future years.

For 2016 (suggestion: use the blank column to record 2015 information, to reconcile totals across each line):

1) Assume that the depreciable asset continues to be depreciated on the methods above.

2) During 2016, the equity investment earned $30,000 and paid dividends to Company Z totaling $18,000. (Use a separate line in the schedule to record this new deferral.)

3) During 2016, $8,000 of the subscriptions were delivered. The balance will be delivered in 2017.

4) During 2016, $2,000 of the warranties was paid out. The balance will be settled in 2017.

5) Pretax financial income was $250,000 in 2016, and a tax rate of 40 percent was enacted for current and future years.

Part II.Schedule - 2015		I.T. Payable	DIT
Pretax financial income
Future Deductible:
Future Taxable:
Taxable (deductible) amount
Tax rate		30%	30%
Income tax payable
DIT - liab (asset)
			DIT
			|
			|
			===
			|
Journal entry - 2015:
Schedule - 2016	Prior	I.T. Payable	DIT
Pretax financial income
Future Deductible:
Future Taxable:
Taxable (deductible) amount
Tax rate		40%	40%
Income tax payable
DIT - liab (asset)
			DIT
			|
			|
			===
			|
Journal entry - 2016:

Answer 1

Calculation of deffered tax for 2015

		Income tax payable	Dit
Pre tax financial income	200000
Future deductible
Unearned subscription revenue	10000		3000
Warranty	6000		1800
Deffered tax asset			4800
Future taxable
Depreciation	(5000)		1500
Equity method income	(6000)		1800
Income as per taxation provisions	205000
Deffred tax liability			3300

Journal entry

Deffered tax asset. Dr. 4800

To income tax expense. 4800

Income tax expense. Dr 3300

To deffered tax liability. 3300

Calculation of deffered tax for 2016

		Income tax payable	dit
Pre tax financial income	250000
Future deductible
Future taxable
Equity method income	(12000)
Depreciation	(11000)
Income as per taxation provisions	227000
Difference	23000
Deffered tax liability	9200

Journal entry to create deffered tax liability in 2016

Income tax expense. Dr. 9200

To deffered tax liability. 9200

Recognising income tax expense from deffered tax asset

For 8000 subscription earned

Income tax expense. dr 2400

To deffered tax asset. 2400

For warranty of 2000 paid in 2016

Income tax expense. Dr. 600

To deffered tax asset 600