Question

Under US GAAP, recognizing expense earlier on the tax return than it is recognized in the income statement

Results in the recognition of a deferred tax asset.

Results in the recognition of a deferred tax liability.

Creates future deductible amounts.

None of the above.

In 2018, Kirk reported Income before Depreciation and Income Tax of $1,640,000. Kirk also had Depreciation Expense of $360,000 on its GAAP based income statement and $480,000 for income tax purposes. Kirk’s income tax rate is 30%. Which of the following would not be correct based upon 2018’s recording of Kirk’s income tax payment?

Decrease in Cash $384,000 (Income tax payment)

Increase in Deferred Tax Liability $36,000

Increase in Income Tax Expense $348,000

Decrease in Deferred Tax Liability of $36,000

In the case of a capital lease (operating or finance), interest expense recognized by the lessee each period over the lease term will:

Increase.

Decrease.

Remain the same because the periodic lease payment is a constant amount.

Remain the same because the implicit rate is fixed in the lease contract.

For which of the following leases will the annual lease expense recognized on the lessee’s income statement be the same amount for each year of the lease?

Operating

Sales-type

Finance

Annual lease expense will be the same each year regardless of lease type.

On January 1, 2018, Barkley Company entered into a four-year lease for machinery with annual payments of $5,000 due at the beginning of the year. Field paid no initial direct costs, no residual guarantees, and the implicit rate of interest is 5%.   The value of the lease liability at the commencement of the lease is 18,616. What amount of amortization of the right to use asset would appear on Barkley’s 2018 income statement relating to the lease?

$4,069

$4,319

$4,535

$4,654

Answer 1

Solution 1:

Under US GAAP, recognizing expense earlier on the tax return than it is recognized in the income statement "Results in the recognition of a deferred tax liability."

Hence 2nd option is correct.

Solution 2:

Taxable income = $1,640,000 - $480,000 = $1,160,000

Income tax to be paid in cash = $1,160,000 * 30% = $348,000

Deferred tax liability to be increase in 2018 = ($480,000 - $360,000) *30% = $36,000

Income tax expense for 2018 = $348,000 + $36,000 = $384,000

Therefore :

1. Decrease in Cash $384,000 (Income tax payment)

2. Increase in Income Tax Expense $348,000

3. Decrease in Deferred Tax Liability of $36,000

would not be correct based upon 2018’s recording of Kirk’s income tax payment

Solution 3:

In the case of a capital lease (operating or finance), interest expense recognized by the lessee each period over the lease term will decrease.

Hence 2nd option is correct.

Solution 4:

Under operating lease annual lease expense recognized on the lessee’s income statement be the same amount for each year of the lease.

Solution 5:

Annual lease payment = $5,000

Interest expense for 2018 = ($18,616 - $5,000) * 5% = $681

Amortization of right to use asset for 2018 = $5,000 - $681 = $4,319

Hence 2nd option is correct.