Problems
Problem 12 – 2
1) When subscriptions are received, a liability for unearned subscription revenue
is created. Liability is not recorded for tax purposes, thus, it causes a temporary
difference between the financial statement carrying amount of the subscription
liability and its tax base.
2) ($ in millions)
2022 2023 2024
Liability – subscriptions:
$0 $40 $20
Pretax Accounting Income (250) (240) (230)
Taxable Income 290 220 260
Carrying Amount $40 $20 $50
Tax base 0 0 0
Deductible Temporary Difference $40 $20 $50
3) Deductible Temporary Difference Deferred Tax Asset
2022 – $ 40,000,000 x 20% = $8,000,000
2023 – $20,000,000 x 20% = $4,000,000
2024 – $50,000,000 x 20% = $10,000,000
4) The deferred tax amount should be classified and presented as a noncurrent
asset in the statement of financial position.
5) Under US GAAP, the deferred tax asset should be classified in the statement
of financial position as a current asset. Since they are one-year subscriptions,
the liability for unearned subscriptions would be classified as a current
liability. Accordingly, the related deferred tax asset should be classified as
current also.
Problem 12 – 4
2022 2023 2024 2025
Pretax accounting income $60,000 $80,000 $70,000 $70,000
Depreciation for tax (39,600) (52,800) (18,000)
(9,600)
Taxable Income $20,400 $27,200 $52,000 $60,400
Tax rate 15% 15% 20% 20%
Tax payable $3,060 $4,080 $10,400 $12,080
2022
Income tax expense 4,500
Deferred tax liability 1,440
Income tax payable 3,060
2023
Income tax expense 9,120
Deferred tax liability 5,040
Income tax payable 4,080
2024
Income tax expense 8,000
Deferred tax liability 2,400
Income tax payable 10,400
2025
Income tax expense 8,000
Deferred tax liability 4,080
Income tax payable 12,800
Problems 12 – 6
1) Income tax expense 8,200,000
Deferred tax asset ($6M 20%) 1,200,000
Deferred tax liability ($30M + 9M) 20%) 7,800,000
Income tax payable ($8M 20%) 1,600,000
2) The deferred tax amount should be presented as a noncurrent tax liability
amounting to $6,600,000.
3) Income tax expense 7,720,000
Deferred tax asset 1,080,000
Deferred tax liability 7,200,000
Income tax payable 1,600,000
Problem 12 – 8
1) The only permanent difference each year is the expense for life insurance
premiums because it is recognized as an income statement expense but it is not
tax deductible in any year. The remaining given are temporary differences. The
temporary differences for casualty insurance expense and the unrealized loss
originate in 2022 and reverse in 2023. The temporary difference for subscriptions
originates each year and reverses the following year. The temporary difference
for the provision originated in 2021 and reverses in 2022.
Current Future Future
($ in millions) Year Taxable Deductible
Amounts Amounts
2022 2023 2023
Pretax accounting income 128
Permanent difference:
Life insurance premiums 2
Temporary differences:
Casualty insurance expense (30) 30
Subscriptions—2021 (reversing) (10)
Subscriptions—2022 ($33 − [$25 − 10]) 18 (18)
Unrealized loss 17 (17)
Loss contingency (reversing) (5)
Taxable income (income tax return) 120
30 (35)
Tax rate 20% 20% 20%
Tax payable currently 24
Deferred tax liability 6
Deferred tax asset 7
Deferred tax Deferred tax
liability asset
Ending balances $6 $7
Less: beginning balances: 0 (3)
Changes needed to achieve desired balances $6 $4
2) 2022
Income tax expense 26,000,000
Deferred tax asset 4,000,000
Deferred tax liability 6,000,000
Income tax payable 24,000,000
3) The net deferred tax asset of $1 million ($7 million − $6 million) should be
reported as a noncurrent asset in the statement of financial position.
($ in millions)
Current Future Future
Year Taxable Deductible
Amounts Amounts
2023 2024 2024
Pretax accounting income 183
Permanent difference:
Life insurance premiums 2
Temporary differences:
Casualty insurance (reversing) 30
Subscriptions—2022 (reversing) (18)
Subscriptions—2023 ($35 − [33 − 18]) 20 (20)
Unrealized loss (reversing) (17)
Taxable income (income tax return) 200
0 (20)
Tax rate 20% 20% 20%
Tax payable currently 40
Deferred tax liability 0
Deferred tax asset (4)
Deferred tax Deferred tax
liability asset
Ending balances $0 $4
Less: beginning balances: (6) (7)
Changes needed to achieve desired balances ($6) ($3)
3) 2023
Income tax expense 37,000,000
Deferred tax liability 6,000,000
Deferred tax asset 3,000,000
Income tax payable 40,000,000
5) The deferred tax asset of $4 million should be presented as a noncurrent asset
in the statement of financial position.
($ in millions)
Current Future Future
Year Taxable Deductible
Amounts Amounts
2023 2024 2024
Pretax accounting income 183
Permanent difference:
Life insurance premiums 2
Temporary differences:
Casualty insurance (reversing) 30
Subscriptions—2022 (reversing) (18)
Subscriptions—2023 ($35 − [33 − 18]) 20 (20)
Unrealized loss (reversing) (17)
Taxable income (income tax return) 200
0 (20)
Tax rate 20% 18% 18%
Tax payable currently 40
Deferred tax liability 0
Deferred tax asset (3.6)
Deferred tax Deferred tax
liability asset
Ending balances $0 $3.6
Less: beginning balances: (6) (7)
Changes needed to achieve desired balances ($6) ($3.4)
6) Income tax expense 37,400,000
Deferred tax liability 6,000,000
Deferred tax asset 3,400,000
Income tax payable 40,000,000
Problem 12 – 10
($ in millions)
Current Future
Prior Years Year Deductible
2020 2021 2022 Amounts
(total)
Accounting loss (135)
Permanent difference:
Fine paid 5
Deductible temporary differences:
Loss provision 10 (10)
Taxable loss (120)
Loss carryback (75) (30) 105
Loss carryforward 15 (15)
0 (25)
Tax rate 20% 20% 20% 20%
Tax payable (refundable) (15) (6) 0
Deferred tax asset (5)
Deferred tax asset:
Ending balance $5
Less: beginning balance (0)
Change needed to achieve desired balance $5
1) Receivable—income tax refund ($15 + 6) 21,000,000
Deferred tax asset 5,000,000
Income tax benefit 26,000,000
2)
Loss before income taxes $135,000,000
Less: Income tax benefit:
Tax refund from loss carryback $21,000,000
Future tax benefits 5,000,000 26,000,000
Net loss $109,000,000
($ in millions)
Current Future
Year Deductible
2023 Amounts
Pretax accounting income 60
Deductible temporary differences:
Loss provision (10)
Loss carryforward (15)
Taxable income 35 0
Tax rate 20% 20%
Tax payable 7
Deferred tax asset 0
Deferred tax asset:
Ending balance (balance currently needed) $0
Less: beginning balance (5)
Change needed to achieve desired balance $(5)
3) Income tax expense 12,000,000
Deferred tax asset 5,000,000
Income tax payable 7,000,000
Problem 12 – 12
1) In the tax return, taxable income is reduced by the $15 million interest,
reducing taxes currently payable by the entire tax benefit.
$15 million 40% = $6 million
2) None of the tax benefit of tax-free interest would be recognized in Tru’s 2022
financial statements under IFRS because it is not probable that Tru’s position
regarding interest is not taxable could be maintained upon examination.
Therefore, Tru should record a $6 million liability for the unrecognized tax
benefits. This represents the potential payment to the taxing authorities in the
event the tax position is ultimately not upheld. It will likely be reported as a long-
term liability because that determination probably will not be made within the
coming year.
3) Tru should recognize the deferred tax liability of $12 million ($60 million
20%) on its installment sales. There is an expected outflow of $12 million if it is
not probable that the tax authorities will not accept Tru’s tax position on its land
sales.
4) The deferred tax liability that Tru should recognize at December 31, 2022 is
$8 million, computed by multiplying $40 million to 20%. Under US GAAP, it is
more likely than not that Tru’s position could be sustained upon examination.
Thus, determining the largest amount that has a greater than 50% likelihood of
sustainability is the best option. Based on the given information, $40 million is the
largest amount that has 60% likelihood of sustainability which is greater than
50%. Therefore, Tru should recognize a deferred tax liability based on this
amount.
