ST.

MARY’S UNIVERSITY
DEPARTMENT OF ACCOUNTING AND FINANCE
ADVANCED FINANCIAL ACCOUNTING 1
GROUP ASSIGNMENT
SECTION – D

Name of group members ID NO

1. Tsegereda Getu RAD/0347/2013
2. Alem Bayable RAD/0311/2013
3. Hana Yared RAD/0329/2013
4. Yeabsira Dawit RAD/0351/2013
5. Selhadin Mhedi RAD/0344/2013
6. Biniyam Lashitaw RAD/0317/2013
7. Rediet Mulat RAD/0342/2013

SUBMISSION DATE:- Jan 16,2024 G.C

SUBMITTED TO:- MR. Hassen Mustefa
Page number 992-993

Q2. What are the two objectives of accounting for income taxes?
The primary objectives of accounting for income taxes are as follows:

1. Reporting Compliance: One of the key objectives is to ensure compliance with the reporting
requirements of tax authorities, such as the Internal Revenue Service (IRS) in the United States. This
involves accurately reporting income taxes in financial statements according to the applicable accounting
and tax laws.

2. Accrual of Tax Liabilities: Another objective is to ensure the proper accrual of tax liabilities, reflecting
the expected tax consequences of future transactions and events in the current financial statements. This
includes recognizing both current and deferred tax liabilities and assets based on accounting standards
and tax laws.

Meeting these objectives not only aligns the financial reporting process with regulatory requirements but
also ensures the accurate reflection of an entity's tax obligations and potential future tax payments.

Q3. Interest on governmental bonds is often referred to as a permanent difference when

determining the proper amount to report for deferred taxes. Explain the meaning of
permanent differences, and give two other examples.
Permanent differences in tax accounting refer to variations between taxable income and accounting
income that will never reverse. In other words, these are differences that affect only the income tax
expense and effective tax rate (ETR) on the financial statements and will not impact future periods' tax
liabilities or assets.

Here are two additional examples of permanent differences besides interest on governmental bonds:

1. Nontaxable Income: Income that is excluded from taxable income but is included in financial
accounting income, such as life insurance proceeds, certain municipal bond interest, or gifts.

2. Tax-Exempt Expenses: Certain expenses that are tax-deductible for financial accounting purposes but
are not deductible for tax purposes, such as fines and penalties or expenses related to tax-exempt income.

These differences lead to the recognition of tax expense without a corresponding tax benefit, resulting in a
permanent variance in the effective tax rate and, therefore, future tax liabilities or assets.

Q4. Explain the meaning of a temporary difference as it relates

to deferred tax computations, and give three examples.

Temporary differences, in the context of deferred tax computations, pertain to differences between the
book/taxable amount of an asset or liability and its associated tax basis that will result in either taxable
amounts or deductible amounts in future periods when the book and tax treatment of such items reverse.

For example:

1. Accelerated Depreciation: This results in a temporary difference where the charge to the income
statement for depreciation (book) is greater than the tax deduction available (tax) in the current year. Over
time, this difference will reverse, resulting in higher taxable income in the future.

2. Revenue Recognition: If revenue is recognized for tax purposes before it's recognized for financial
reporting, this creates a temporary difference. The tax obligation occurs earlier than the recognition of
revenue in financial statements.

3. Bad Debt Reserves: Differences in the timing of deductibility of bad debts for tax versus financial
purposes cause a temporary difference. This arises when the provision for bad debts is recognized for
financial accounting purposes, but the deduction is claimed once the debt becomes uncollectible for tax
purposes.

In essence, temporary differences create future tax consequences that need to be recognized, leading to
deferred tax assets and liabilities on the balance sheet.

Q8. What is the difference between a future taxable amount and a future deductible
amount? When is it not appropriate to recognize a portion or all of a deferred tax asset?
The difference between a future taxable amount and a future deductible amount lies in their tax
implications in future periods:

Future Taxable Amount:

- This represents an amount that will be subject to taxable income in future periods.

- For example, it can arise from a temporary difference where taxable income exceeds accounting income,
leading to a future tax liability.

Future Deductible Amount:

- This represents an amount that will be tax-deductible in future periods.

- An example of this can be seen in a temporary difference where accounting income exceeds taxable
income, giving rise to a future tax asset.

It is not appropriate to recognize a portion or all of a deferred tax asset if there is not enough certainty to
support that it will be realized. Specifically, a deferred tax asset cannot be recognized when it is more
likely than not (greater than a 50% likelihood) that some portion or all of the deferred tax asset will not be
realized. This evaluation requires careful consideration of future taxable income against feasible tax
planning strategies and expectations of future profitability. Therefore, prudence is essential when
recognizing deferred tax assets.

Q10. How are deferred tax assets and deferred tax liabilities reported on the statement of
financial position?
Deferred tax assets and deferred tax liabilities are reported on the statement of financial position, also
known as the balance sheet, under the category of non-current assets and non-current liabilities,
respectively.

Deferred Tax Assets:

- These represent the future tax benefits resulting from the overpayment or prepayment of taxes, or the
future deductibility of expenses that have been recognized in the financial statements but not yet on the
tax return.

- Deferred tax assets are reported in the non-current assets section of the balance sheet, following fixed
assets and before any investments or intangible assets.

Deferred Tax Liabilities:

- These arise from the recognition of certain income and expenses in financial reporting that are at a
different timing or amount than for tax purposes, resulting in future taxable amounts.

- Deferred tax liabilities are reported in the non-current liabilities section of the balance sheet, typically
following long-term provisions or other non-current financial obligations.

The placement of these items as non-current reflects the expectation that they will reverse in future
periods in relation to future taxable amounts and deductible amounts, respectively.

Q16. What are the possible treatments for tax purposes of a net operating loss? What are
the circumstances that determine the option to be applied? What is the proper treatment of
a net operating loss for financial reporting purposes?
For tax purposes, a net operating loss (NOL) can typically be addressed using the following treatments:

1. Carryback: This involves applying the NOL to prior tax years, usually up to two years, to offset taxable
income and potentially receive refunds for taxes paid in those years.

2. Carryforward: If the NOL is not fully absorbed through carryback, the remaining amount can be
carried forward to offset future taxable income, generally for up to 20 years.

The circumstances that determine the option to be applied include the availability of prior years' income
to absorb the NOL (for carryback), as well as the expected future profitability and taxable income (for
carryforward).

For financial reporting purposes, the proper treatment of a net operating loss involves the recognition of a
deferred tax asset representing the future tax benefit from the NOL. This deferred tax asset is recognized
to the extent that it is more likely than not (i.e., greater than a 50% likelihood) that it will be realized. The
expected future taxable income is a key consideration in assessing the realizability of the deferred tax
asset. If it's uncertain whether the NOL will be utilized, a valuation allowance might be required to reduce
the deferred tax asset to its expected realizable amount.

PAGE 993-994

BE19-1 In 2015, Amirante Corporation had pretax financial income of $168,000 and taxable income of
$120,000. The difference is due to the use of different depreciation methods for tax and accounting
purposes. The effective tax rate is 40%. Compute the amount to be reported as income taxes payable at
December 31, 2015.
Given

Taxable Income: $120,000

Effective Tax Rate: 40%

Income Taxes Payable: $120,000 (Taxable Income) * 40% (Effective Tax Rate) = $48,000

The amount to be reported as income taxes payable at December 31, 2015, is $48,000.

BE19-2 Oxford Corporation began operations in 2015 and reported pretax financial income of €225,000
for the year. Oxford’s tax depreciation exceeded its book depreciation by €40,000. Oxford’s tax rate for
2015 and years thereafter is 30%. In its December 31, 2015, statement of financial position, what amount
of deferred tax liability should be reported?
1. Calculate the Temporary Difference:

Tax Depreciation - Book Depreciation = €40,000

2. Find the Deferred Tax Liability:

€40,000 * 30% (Tax Rate) = €12,000

Therefore, the amount of the deferred tax liability to be reported in the December 31, 2015 statement of
financial position is €12,000.

BE19-5 At December 31, 2015, Suffolk Corporation had an estimated warranty liability of £105,000 for
accounting purposes and £0 for tax purposes. (The warranty costs are not deductible until paid.) The
effective tax rate is 40%. Compute the amount Suffolk should report as a deferred tax asset at December
31, 2015.
Deferred Tax Asset = Temporary Difference * Tax Rate

Deferred Tax Asset = £105,000 * 40%

Deferred Tax Asset = £42,000

BE19-11 At December 31, 2015, Takeshi Corporation had a deferred tax liability of ¥680,000,000
resulting
from future taxable amounts of ¥2,000,000,000 and an enacted tax rate of 34%. In May 2016, a new
income
tax act is signed into law that raises the tax rate to 40% for 2016 and future years. Prepare the journal
entry
for Takeshi to adjust the deferred tax liability.

BE19-12 Conlin Corporation had the following tax information.

BRIEF EXERCISES
Year Taxable Income Tax Rate Taxes Paid
2012 €300,000 35% €105,000
2013 €325,000 30% € 97,500
2014 €400,000 30% €120,000

In 2015, Conlin suffered a net operating loss of €480,000, which it elected to carry back. The 2015
enacted
tax rate is 29%. Prepare Conlin’s entry to record the effect of the loss carryback.

BE19-15 Youngman Corporation has temporary differences at December 31, 2015, that result in the
following deferred taxes.
Deferred tax asset HK$24,000
Deferred tax liability HK$69,000
Indicate how these balances would be presented in Youngman’s December 31, 2015, statement of
financial position.
1. Deferred Tax Asset:
 The deferred tax asset of HK$24,000 would be presented on the statement of financial position under
"Assets." This represents potential future tax benefits arising from deductible temporary differences, such
as expenses recognized for financial reporting purposes but not yet for tax purposes. It's essentially linked
to potential tax relief in future accounting periods.

2. Deferred Tax Liability:

The deferred tax liability of HK$69,000 would be presented on the statement of financial position under
"Liabilities." This represents the future taxable amounts resulting from taxable temporary differences,
such as when revenue is recognized for tax purposes before it is recognized for financial reporting
purposes. It signifies future tax obligations.

PAGE 995

E19-6 (Identify Temporary or Permanent Differences) Listed below and on page 996 are items that
are commonly accounted for differently for financial reporting purposes than they are for tax purposes.
Instructions
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 income 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) ___2___ An accelerated depreciation system is used for tax purposes, and the straight-line
depreciation
method is used for financial reporting purposes for some plant assets.
(b) ____2__ A landlord collects some rents in advance. Rents received are taxable in the period when
they are received.
(c) __3____ Expenses are incurred in obtaining tax-exempt income.
(d) ___1___ Costs of guarantees and warranties are estimated and accrued for financial reporting
purposes.
(e) ___2___ Installment sales of investments are accounted for by the accrual method for financial
reporting purposes and the installment method for tax purposes.
(f) ___3___ Interest is received on an investment in tax-exempt governmental obligations.

(g) ___2___ 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.

(h) __3____ The tax return reports a deduction for 80% of the dividends received from various
corporations.
The cost method is used in accounting for the related investments for financial
reporting purposes.
(i) ___1___ 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.
(j) ___1___ Expenses on share options are accrued for financial reporting purposes.

E19-9 (Carryback and Carryforward of NOL, No Temporary Differences) The pretax financial
income
(or loss) figures for Synergetics Company are as follows.
8
2010 $160,000
2011 250,000
2012 90,000
2013 (160,000)
2014 (350,000)
2015 120,000
2016 100,000

Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume
a
45% tax rate for 2010 and 2011 and a 40% tax rate for the remaining years.
Instructions
Prepare the journal entries for the years 2012 to 2016 to record income tax expense and the effects of the
net operating loss carrybacks and carryforwards, assuming Synergetics Company uses the carryback
provision. All income and losses relate to normal operations. (In recording the benefits of a loss
carryforward, assume that it is probable the loss carryforward will be realized.)
1. Calculate Income Tax Expense:

- For 2010 and 2011: Income Tax Expense = Pretax Financial Income * 45%
 - For 2012 to 2016: Income Tax Expense = Pretax Financial Income * 40%

- Since Pretax Financial Income and Taxable Income are the same, the Income Tax Expense equals
Taxable Income multiplied by the applicable tax rate.

2. Journal Entries for Income Tax Expense:

2012:

Income Tax Expense Dr. $36,000

Deferred Tax Asset Cr. $36,000

2013:

Deferred Tax Asset (2012 Loss Carryback Benefit) Dr. $72,000

Income Tax Expense Cr. $72,000

2014:

Deferred Tax Asset (2013 Loss Carryforward Benefit) Dr. $140,000

Income Tax Expense Cr. $140,000

2015:

Income Tax Expense Dr. $48,000

Deferred Tax Asset Cr. $48,000

2016:

Income Tax Expense Dr. $40,000

Deferred Tax Asset Cr. $40,000

3. The journal entries record the income tax expense and the effects of the NOL carrybacks and
carryforwards within the specified years as they pertain to Synergetics Company's operations given
the utilization of the carryback provision and assuming the realization of the loss carryforward
benefits.
E19-16 (Deferred Tax Liability, Change in Tax Rate, Prepare Section of Income Statement)
Sharrer Inc.’s
only temporary difference at the beginning and end of 2015 is caused by a $2 million deferred gain for
tax
purposes for an installment sale of a plant asset, and the related receivable is due in equal
installments in
2016 and 2017. The related deferred tax liability at the beginning of the year is $800,000. In the third
quarter
of 2015, a new tax rate of 34% is enacted into law and is scheduled to become effective for 2017.
Taxable
income for 2015 is $5,000,000, and taxable income is expected in all future years

Instructions
(a) Determine the amount reported as a deferred tax liability at the end of 2015. Indicate proper
classification(s).
(b) Prepare the journal entry (if any) necessary to adjust the deferred tax liability when the new tax
rate is enacted into law.
(c) Draft the income tax expense portion of the income statement for 2015. Begin with the line
“Income
before income taxes.” Assume no permanent differences exist.

E19-23 (NOL Carryback and Carryforward, Recognition versus Non-Recognition) Sondgeroth

Inc. reports
the following pretax income (loss) for both financial reporting purposes and tax purposes. (Assume the
carryback provision is used for a net operating loss.)
47
8
The tax rates listed were all enacted by the beginning of 2013.
Instructions
(a) Prepare the journal entries for the years 2013–2016 to record income tax expense (benefit) and
income taxes payable (refundable) and the tax effects of the loss carryback and carryforward,
assuming that at the end of 2015 it is probable that the benefits of the loss carryforward will be
realized in the future.
(b) Using the assumption in (a), prepare the income tax section of the 2015 income statement,
beginning
with the line “Operating loss before income taxes.”
(c) Prepare the journal entries for 2015 and 2016, assuming that based on the weight of available
evidence
at 12/31/15, it is probable that one-fourth of the benefits of the loss carryforward will not be realized.
(d) Using the assumption in (c), prepare the income tax section of the 2015 income statement,
beginning
with the line “Operating loss before income taxes.”