A) Future tax asset and liability
In 2008, the initial year of its existence, Hyland Company's accountant, in preparing both the income statement and the tax return, developed the following list of items causing differences between accounting and taxable income:
1. The company sells its merchandise on an installment contract basis. In 2008, Hyland elected, for tax purposes, to report the gross profit from these sales in the years the receivables are collected. However, for financial statement purposes, the company recognized all the gross profit in 2008. These procedures created a $240,000 difference between book and taxable incomes. The future collection of the installment receivables are expected to result in taxable amounts of $120,000 in each of the next two years. (Note: the company treats installment contracts receivable as a current asset on its balance sheet.)
2. The company amortizes all of its amortizable capital assets using CCA for tax purposes but uses straight-line for accounting purposes. These procedures resulted in $42,000 excess amortization for tax purposes over accounting amortization. The temporary difference due to excess tax amortization will reverse equally over the three year period from 2009-2011.
3. Hyland leased some of its property to Simms Company on July 1, 2008. The lease was to expire on July 1, 2010 and the monthly rentals were to be $30,000. Simms, however, paid the first year's rent in advance and Hyland reported this entire amount on its tax return. These procedures resulted in a $180,000 difference between book and taxable incomes. (Note: this lease was an operating lease and Hyland classified the unearned rent as a current liability on its balance sheet.)
4. In 2008, Hyland paid $3,000 for membership in a local golf club.
Required (SHOW ALL WORK):
The income statement of Hyland Company showed "Income before income taxes" of $900,000 in 2008. The enacted tax rates are 40% for 2008 and 2009 and 35% for 2010 and after. No other differences between book and taxable incomes existed, except for those mentioned above.
(a) Prepare the reconciliation between the accounting income and the taxable income and compute the current income tax expense for year 2008
(b) Prepare a schedule of future taxable and deductible amounts at the end of 2008 and compute future tax assets and/or liabilities at the end of 2008
(c) Prepare the journal entries to record income tax expense, income tax payable and future income taxes for 2008
(d) Indicate how income tax expense and any future income taxes should be disclosed on the income statement and on the balance sheet under generally accepted accounting principles. Show the amounts for these items and indicate specifically where they would be disclosed
B) Losses carryback and carryforward
DANY Inc. reported the following accounting income (loss) and related tax rates for the years 2003 to 2007.
Accounting income (loss) and taxable income (loss) were the same for all years since 2003. The tax rate for 2008 to 2010 has been enacted in 2007 and is 28%
Required (SHOW ALL WORKI:
(a) What are the entries in 2007 to record the tax loss carryback?
(b) What entries would be made in 2007 to recognize the loss carryforward? (Assume that at the end of 2007 it is more likely than not that the future tax asset will be realized.)