Question

In: Accounting

You are the new accounting manager at the Barry Transport Company. Your CFO has asked you...

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 $75 million and taxable income was $13 million for the year ended December 31, 2018.

The difference was due to three items:

Tax depreciation exceeds book depreciation by $60 million in 2018 for the business complex acquired that year. This amount is scheduled to be $70 million in 2019 and to reverse as ($70 million) and ($60 million) in 2020, and 2021, respectively.

Insurance of $10 million was paid in 2018 for 2019 coverage.

A $8 million loss contingency was accrued in 2018, to be paid in 2020.

No temporary differences existed at the beginning of 2018.

The tax rate is 40%.


Required:
1. Determine the amounts necessary to record income taxes for 2018 and prepare the appropriate journal entry.
2. Assume the enacted federal income tax law specifies that the tax rate will change from 40% to 35% in 2020. 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 2019 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 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.

Determine the amounts necessary to record income taxes for 2018 and prepare the appropriate journal entry.

Solutions

Expert Solution

Computation of Income Tax Expense, Deffered Tax Liability (in Million)
2018 2019 2020 2021
Pretax Accounting Income $75
Taxable Income $13
Tax Rate 40% 40% 35% 35%
Tax Depreciation exceded by book Depreciation -$60 -$70 $70 $60
Insurance Expense -$10 $10
Contigency Loss $8 -8
Timing Difference -$62 -$60 $62 $60
Deferred Tax Liability Created at the End $24.80 $21.00 $21.70
=$62*40% =$60*35% =$62 * 35%
Deffered Tax Reversal - $3.80 -$0.70 $21.70
Income Tax Payable as per Taxable income $5.20 $0.00 $0.00 $0.00
Income Tax Expense $30.00 -$3.80 $0.70 -$21.70
Computation of Income Tax Expense, Deffered Tax Liability (in Million)
2018 2019 2020 2021
Pretax Accounting Income $75
Taxable Income $13
Tax Rate 40% 40% 35% 35%
Tax Depreciation exceded by book Depreciation -$60 -$70 $70 $60
Insurance Expense -$10 $10
Contigency Loss $8 -8
Timing Difference -$62 -$60 $62 $60
Deferred Tax Liability Created at the End $24.80 $21.00 $21.70
=$62*40% =$60*35% =$62 * 35%
Deffered Tax Reversal - $3.80 -$0.70 $21.70
Income Tax Payable as per Taxable income $5.20 $0.00 $0.00 $0.00
Income Tax Expense $30.00 -$3.80 $0.70 -$21.70

Related Solutions

You are the new accounting manager at the Barry Transport Company. Your CFO has asked you...
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 $62 million and taxable income was $10 million for the year ended December 31, 2018. 2)The difference was due to three items: A)Tax depreciation exceeds book depreciation by $50 million in 2018 for the business complex acquired that year. This amount is scheduled to be $80 million...
You are the new accounting manager at the Barry Transport Company. Your CFO has asked you...
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 $75 million and taxable income was $13 million for the year ended December 31, 2018. The difference was due to three items: Tax depreciation exceeds book depreciation by $60 million in 2018 for the business complex acquired that year. This amount is scheduled to be $70 million...
You are the new accounting manager at the Barry Transport Company. Your CFO has asked you...
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 $64 million and taxable income was $11 million for the year ended December 31, 2018. The difference was due to three items: Tax depreciation exceeds book depreciation by $50 million in 2018 for the business complex acquired that year. This amount is scheduled to be $70 million...
As the new financial manager of your company, the CEO has asked you to provide a...
As the new financial manager of your company, the CEO has asked you to provide a brief analysis of the company’s performance to present at the upcoming board of directors meeting. The CEO has asked that you assess the company’s performance against your company’s industry. Thus, to do this, you will need to use ratio analysis or other techniques to determine areas in which the company is doing well, as well as areas that management should look at. ( you...
You are the new controller for Moonlight Bay Resorts. The company CFO has asked you to...
You are the new controller for Moonlight Bay Resorts. The company CFO has asked you to determine the company’s interest expense for the year ended December 31, 2018. Your accounting group provided you the following information on the company's debt: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) On July 1, 2018, Moonlight Bay issued bonds with a face amount of $2,300,000....
You are the new controller for Banana, Inc.. The company CFO has asked you to develop...
You are the new controller for Banana, Inc.. The company CFO has asked you to develop the appropriate worksheets and then journal entries to support several lease contracts as applied based on the new lease regulations. Your accounting group provided you the following information regarding the lease: On January 2, 2019, another of Banana’s subsidiaries, Apple, entered into an operating lease for four years, with semi-annual lease payments as follows:  payments 1 and 2 = $22,500; payments 3 and 4 =...
You are the new controller for Banana, Inc..  The company CFO has asked you to develop the...
You are the new controller for Banana, Inc..  The company CFO has asked you to develop the appropriate worksheets and then journal entries to support several lease contracts as applied based on the new lease regulations.  Your accounting group provided you the following information regarding the lease: On January 2, 2019, Banana’s subsidiary, Cream, entered into an equipment lease for four years, with semi-annual payments, for a machine that had an eight (8) year life and a fair value of $420,000.  The payments...
You are the new controller for Moonlight Bay Resorts. The company CFO has asked you to...
You are the new controller for Moonlight Bay Resorts. The company CFO has asked you to determine the company’s interest expense for the year ended December 31, 2021. Your accounting group provided you the following information on the company's debt: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) On July 1, 2021, Moonlight Bay issued bonds with a face amount of $2,400,000....
You are the new controller for Moonlight Bay Resorts. The company CFO has asked you to...
You are the new controller for Moonlight Bay Resorts. The company CFO has asked you to determine the company’s interest expense for the year ended December 31, 2021. Your accounting group provided you the following information on the company's debt: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) On July 1, 2021, Moonlight Bay issued bonds with a face amount of $2,400,000....
You are the new controller for Banana, Inc.. The company CFO has asked you to develop...
You are the new controller for Banana, Inc.. The company CFO has asked you to develop the appropriate worksheets and then journal entries to support several lease contracts as applied based on the new lease regulations. Your accounting group provided you the following information regarding the lease: On January 2, 2018, Banana leased equipment, with a fair value of $675,000, under a capital lease calling for seven annual lease payments of $110,000 beginning January 2, 2018, and continuing each December...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT