DeVry Acc 312 Week 1 Homework Exercises 2014

Week One - Homework Exercises E16-3, E16-5, E16-10, and E16-22

E16-3 Ayres Services acquired an asset for $80 million in 2013. The asset is depreciated for financial reporting purposes over four years on a straight-line basis (no residual value). For tax purposes the asset’s cost is depreciated by MACRS. The enacted tax rate is 40%. Amounts for pretax accounting income, depreciation, and taxable income in 2013, 2014, 2015, and 2016 are as follows:

2013 2014 2015 2016

Pretax accounting income $330 $350 $365 $400

Depreciation on the income statement 20 20 20 20

Depreciation on the tax return (25) (33) (15) (7)

Taxable income $325 $337 $370 $413

Required: For December 31 of each year, determine (a) the temporary book–tax difference for the depreciable asset and (b) the balance to be reported in the deferred tax liability account.

E16-5 Lance Lawn Services reports warranty expense by estimating the amount that eventually will be paid to satisfy warranties on its product sales. For tax purposes, the expense is deducted when the cost is incurred. At December 31, 2013, Lance has a warranty liability of $1 million and taxable income of $75 million. At December 31, 2012, Lance reported a deferred tax asset of $435,000 related to this difference in reporting warranties, its only temporary difference. The enacted tax rate is 40% each year.

Required: Prepare the appropriate journal entry to record Lance’s income tax provision for 2013.

E16-10 At the end of 2012, Payne Industries had a deferred tax asset account with a balance of $30 million attributable to a temporary book–tax difference of $75 million in a liability for estimated expenses. At the end of 2013, the temporary difference is $70 million. Payne has no other temporary differences and no valuation allowance for the deferred tax asset. Taxable income for 2013 is $180 million and the tax rate is 40%.

Required: 1. Prepare the journal entry(s) to record Payne’s income taxes for 2013, assuming it is more likely than not that the deferred tax asset will be realized.

2. Prepare the journal entry(s) to record Payne’s income taxes for 2013, assuming it is more likely than not that one-half of the deferred tax asset will ultimately be realized.

E16-22 "(This exercise is based on the situation described in E 16–21, modified to include a carryforward in addition to a carryback.)

Wynn Sheet Metal reported an operating loss of $160,000 for financial reporting and tax purposes in 2013. The enacted tax rate is 40%. Taxable income, tax rates, and income taxes paid in Wynn‘s first four years of operation were as follows:"

Taxable Income Tax Rates Income Taxes Paid

2009 $60,000 30% $18,000

2010 70,000 30 21,000

2011 80,000 40 32,000

2012 60,000 45 27,000

Required: 1. Prepare the journal entry to recognize the income tax benefit of the operating loss. Wynn elects the carryback option.

2. Show the lower portion of the 2013 income statement that reports the income tax benefit of the operating loss.