Three Difference, No Beginning Deferred Taxes, Multiple Rates
The following information is available for Remmers Corporation for 2014.
1) Depreciation reported on the tax return exceeded depreciation reported on the income
statement by $120,000. This difference will reverse in equal amounts of $30,000 over the
2) Interest received on municipal bonds was $10,000.
3) Rent collected in advance on January 1, 2014, totaled $60,000 for a 3-year period. Of this
amount, $40,000 was reported as unearned at December 31, 2014, for book purposes.
4) The tax rates are 40% for 2014 and 35% for 2015 and subsequent years.
5) Income taxes of $320,000 are due per the tax return for 2014.
6) No deferred taxes existed at the beginning of 2014.
a) Compute taxable income for 2014.
b) Compute pretax financial income for 2014.
c) Prepare the journal entries to record income tax expense, deferred income taxes, and
income taxes payable for 2014 and 2015. Assume taxable income was $980,000 in 2015.
d) Prepare the income tax expense section of the income statement for 2014, beginning with
“Income before income taxes.”
One Temporary Difference, Tracked for 4 Years, One Permanent Difference, Change in Rate
The pretax financial income of Truttman Company differs from its taxable income throught each
of 4 years as follows.
Year Pretax Financial Income Taxable Income Tax Rate
2014 290000 180000 35% 140000
2015 320000 225000 40% 125000
2016 350000 260000 40% 120000
2017 420000 560000 40% -110000
Pretax financial income for each year includes a nondeductible expense of $30,000 (never
deductible for tax purposes). The remainder of the difference between pretax financial income
and taxable income in each period is due to one depreciation temporary difference. No deferred
income taxes existed at the beginning of 2014.
a) Prepare journal entries to record income taxes in all 4 years. Assume that the change in
the tax rate to 40% was not enacted until the beginning of 2015.
b) Prepare the income statement for 2015, beginning with Income before income taxes.
Permanent and Temporary Differences, One Rate
The accounting records of Shinault Inc. show the following data for 2014 (its first year of operations).
1) Life insurance expense on officers was $9,000.
2) Equipment was acquired in early January for $300,000. Straight-line depreciation over a 5-year 60000
life is used, with no salvage value. For tax purposes, Shinault used a 30% rate to calculate 90000
3) Interest revenue on State of New York bonds is totaled $4,000.
4) Product warranties were estimated to be $50,000 in 2014. Actual repair and labor costs related
to the warranties in 2014 were $10,000. The remainder is estimated to be paid evenly in 2015 and 2016.
5) Gross profit on an accrual basis was $100,000. For tax purposes, $75,000 was recorded on the installment-
6) Fines incurred for pollution violations were $4,200.
7) Pretax financial income was $750,000. The tax rate is 30%.
a) Prepare a schedule starting with pretax financial income in 2014 and ending with taxable income in 2014.
b) Prepare the journal entry for 2014 to record income taxes payable, income tax expense, and deferred
Identify Temporary or Permanent Differences
Listed below are items that are commonly accounted for differently for financial reporting purposes
than they are for tax purposes.
For each item below, indicate whether it involves:
1) A temporary difference that will result in future deductible amounts and, therefore, will
usually give rise to a deferred tax asset.
2) A temporary difference that will result in future taxable amounts and, therefore, will usually
give rise to a deferred income tax liability.
3) A permanent difference.
Use the appropriate number to indicate your answer for each.
a) The MACRS depreciation system is used for tax purposes, and the straight-line
depreciation method is used for financial reporting purses for some plant assets.
b) A landlord collects some rents in advance. Rents received are taxable in the period
when they are received.
c) Expenses are incurred in obtaining tax-exempt income.
d) Costs of guarantees and warranties are estimated and accrued for financial reporting
e) Installment sales of investments are accounted for the accrual method for financial
reporting purposes and the installment method for tax purposes.
f) For some assets, straight-line depreciation is used for both financial reporting
purposes and tax purposes but the assets’ lives are shorter for tax purposes.
g) Interest is received on an investment in tax-exempt municipal obligations.
h) Proceeds are received from a life insurance company because of the death of a key
officer. (The company carries a policy on key officers.)
i) The tax return reports a deduction for 80% of the dividends received from U.S.
j) Estimated losses on pending lawsuits and claims are accrued for books. These losses
are tax deductible in the period(s) when the related liabilities are settled.
k) Expenses on stock options are accrued for financial reporting purposes.