Chapter 12 WWW Cases

Case 12-10 Recording the Impact of TCJA

Assume that at the end of 2017, Jenks Inc’s, only temporary difference is a $2,000,000 taxable
temporary difference that arose in the prior year and is expected to reverse in 2018 and 2019.
The deferred tax liability at the beginning of 2017 is $700,000, reflecting the 35% corporate
tax rate in effect at that date. On December 22, 2017, legislation was enacted by Congress and
signed by the President that reduced the tax rate to 21%, effective January 1, 2018.

Required:

a. What is Jenks Inc’s deferred tax liability on December 2017?

b. By how much did Jenks Inc’s tax liability decrease?
c. How is the adjustment in Jenks Inc’s tax liability recorded?

Case 12-11 Effect of Income Tax Law Change on Items Not Originally Recognized in
Continuing Operations

Assume that Dunning Brothers, a calendar-year company has only one deferred tax item, an
NOL carryforward related to losses of $100 million from discontinued operations recognized
in the prior year. The carryforward is expected to reduce taxes payable in 2018 and beyond
and the company does not have income in the carryback periods.

Required:

How would the enactment of the TCJA effect this situation?

Case 12-12 The Impact of Changes in Rates on Deferred Tax Amounts

Explain the effect that changes in income tax rates have on income tax expense for companies
that have deferred income tax assets and for companies that have deferred income tax
liabilities.

Case 12-13 Objectives of Accounting for Income Taxes

The amount of income taxes due to the government for a period of time is frequently different
that the amount reported on the income statement for that period as income tax expense.

Required:

a. What are the objectives of accounting for income taxes in general-purpose financial
statements?
b. Discuss the basic principles that are applied in accounting for income taxes at the date
of the financial statements to meet the objectives discussed in Part.

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 c. Outline the procedures used in the annual computation of deferred tax liabilities and
assets.

Case 12-14 Temporary vs. Permanent Differences

Differences between accounting and taxable income may be either temporary or permanent.

Required:

a. Indicate whether each of the following independent situations should be treated as a

temporary difference or as a permanent difference and explain why.

1. Estimated warranty costs (covering a 3-year warranty) are expensed for financial
reporting purposes at the time of sale but deducted for income tax purposes when
paid.
2. Depreciation for book and income tax purposes differs because of different bases
of carrying the related property, which was acquired in a trade-in. The different
bases are a result of different rules used for book and tax purposes to compute the
basis of property acquired in a trade-in.
3. A company properly uses the equity method to account for its 30% investment in
another company. The investee pays dividends that are about 10% of its annual
earnings.
4. A company reports a gain on an involuntary conversion of a nonmonetary asset to
a monetary asset. The company elects to replace the property within the statutory
period using the total proceeds so the gain is not reported on the current year's tax
return.
5. Premiums on officers' life insurance policies with the company as beneficiary.
6. Interest on bonds issued by the city of Chicago.
7. Gross profits on installment sales. The company uses the accrual method for
financial accounting purposes and the cash recovery method for income tax
purposes

b. Discuss the nature of the deferred income tax accounts and possible classifications in a
company's balance sheet. Indicate the manner in which these accounts are to be
reported.

Case 12-15 Recording Temporary Differences

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A company purchases a machine in 2020 for $60,000. It is being depreciated on a straight-line
basis over 20 years for book purposes and over 15 years for tax purposes and is expected to be
used for the forceable future. At the end of 2020, depreciation expense for book purposes is
$3,000 and for tax purposes is $4,000.
Book basis Tax basis
Historical basis $60,000 $60,000

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Depreciation to date (3,000) (4,000)
Basis at balance sheet date $57,000 $56,000

Required:

Is there a temporary difference to be recorded?

Case 12-16 Investment Tax Credit

Lenox Company is entitled to an investment tax credit (ITC) for 30% of the purchase price of
certain qualifying assets. The ITC can be used to reduce the company’s income tax obligation
in the year the assets are purchased. The tax
law does not require a reduction to the tax basis of the qualifying assets. The applicable tax
rate is 25%.

On January 1, 2020, Lenox Company purchases $1,000,000 of qualifying assets. The assets
will be depreciated for both financial statement and tax purposes on a straight-line basis over a
5-year period. There are no uncertain tax positions relating to the ITC or tax depreciation.

Required:

How should Lenox Company account for the ITC?

Case 12-17 FIN 48

FIN 48 requires companies to evaluate uncertain tax positions.

Required:

Discuss the requirements of FIN No. 48 “Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109”

Case 12-18 Uncertain Tax Position

Canning Corporation has an uncertain tax position with a deferred tax benefit of $100,000.
The likelihood of realization of this uncertain tax position is illustrated in the following
probability distribution:
Expected tax benefit Probability of Occurrence
$100,000 0%
60,000 45%
40,000 40%
0 15%

Required:

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At what amount should Canning recognize this uncertain tax position?

Case 12-19 Financial Analysis

Log onto the World Wide Web and search for the annual reports of three domestic Fortune
1000 companies and three international companies. (Consult the Preface for websites of
companies or search for different companies.)

Required:

a. For the domestic companies answer the following questions for the last reporting year:
i. Do the amounts for income tax expense and income tax payable differ? If so,
review the footnotes to determine the reason for this difference.
ii. Do the companies disclose either deferred tax assets or deferred tax liabilities?
iii. Do any of the companies disclose net operating loss carrybacks or carryforwards?
b. For the foreign companies answer the following questions for the last reporting year:
i. What method of accounting for interperiod tax timing differences are the
companies using?
ii. Do the amounts for income tax expense and income tax payable differ? If so,
review the footnotes to determine the reason for this difference.
iii. Do the companies disclose either deferred tax assets or deferred tax liabilities?
iv. Do any of the companies disclose net operating loss carrybacks or carryforwards?

Financial Analysis Case

Analyzing income tax expense and income taxes payable for your company.

Required:

a. Analyze your company’s provision for income taxes and income taxes payable
including:
i. The amount of income taxes that would have been paid at the statutory rate and the
amount actually paid
ii. Changes in the deferred tax asset and liability accounts
iii. Changes (if any) in the amounts of income tax carrybacks and carryforwards
b. Conduct a similar analysis for your two competitor companies and discuss any
differences you find.