CH-16 Accounting for Income Taxes – Intermediate Accounting : Book Guide

Chapter 16 Accounting for Income Taxes 1 Chapter 16 Accounting for Income Taxes QUESTIONS FOR REVIEW OF KEY TOPICS Question 16-1 Income tax expense is comprised of both the current and the deferred tax consequences of events and transactions already recognized. Specifically, it includes (a) the income tax that is payable currently and (b) the change in the deferred tax liability (or asset). Apparently, in the situation described, temporary differences required a $4.4 million increase in the deferred tax liability, a $4.4 million decrease in the deferred tax asset, or some combination of the two. Question 16-2 Temporary differences between the reported amount of an asset or liability in the financial statements and its tax basis are primarily caused by revenues, expenses, gains, and losses being included in taxable income in a year earlier or later than the year in which they are recognized for financial reporting purpose, although there are other, less common, events that can cause these temporary differences. Some temporary differences create deferred tax liabilities because they result in taxable amounts in some future year(s) when the related assets are recovered or the related liabilities are settled (when the temporary differences reverse). An example is the receivable created when installment sale gross profit is recognized for financial reporting purposes. When this asset is recovered, taxable amounts are produced because the installment sale gross profit is then recognized for tax purposes. Some temporary differences create deferred tax assets because they result in deductible amounts in some future year(s) when the related assets are recovered or the related liabilities are settled (when the temporary differences reverse). An example is the liability created when estimated warranty expense is recognized for financial reporting purposes. When this liability is settled, deductible amounts are produced because the warranty cost is then deducted for tax purposes. The deferred tax liability or asset each year is the tax rate times the temporary difference between the financial statement carrying amount of the receivable or liability and its tax basis. Question 16-3 Future deductible amounts mean that taxable income will be decreased relative to accounting income in one or more future years. Two examples are (a) estimated expenses that are recognized on income statements when incurred, but deducted on tax returns in later years when actually paid and (b) revenues that are taxed when collected, but are recognized on income statements in later years when actually earned. These situations have favorable tax consequences that are recognized as deferred tax assets. Question 16-4 Deferred tax assets are recognized for all deductible temporary differences and operating loss carryforwards. However, a deferred tax asset is then reduced by a valuation allowance if it is “more likely that not” that some portion or all of the deferred tax asset will not be realized. 2 The decision as to whether a valuation allowance is needed should be based on the weight of all available evidence. 3 Answers to Questions (continued) Question 16-5 Nontemporary or “permanent” differences are caused by transactions and events that under existing tax law will never affect taxable income or taxes payable. Some provisions of the tax laws exempt certain revenues from taxation and prohibit the deduction of certain expenses. Provisions of the tax laws, in some other instances, dictate that the amount of a revenue that is taxable or expense that is deductible permanently differs from the amount reported in the income statement. Non-temporary or “permanent” differences are disregarded when determining both the tax payable currently and the deferred tax effect. Question 16-6 Examples of nontemporary or “permanent” differences are: • Interest received from investments in bonds issued by state and municipal governments (not taxable) • Investment expenses incurred to obtain tax-exempt income (not tax deductible) • Life insurance proceeds upon the death of an insured executive (not taxable) • Premiums paid for life insurance policies (not tax deductible) • Compensation expense pertaining to some employee stock option plans (not tax deductible) • Expenses due to violations of the law (not tax deductible) • Portion of dividends received from U.S. corporations that is not taxable due to the “dividends received deduction” • Tax deduction for depletion of natural resources (percentage depletion) that permanently exceeds the income statement depletion expense (cost depletion) Question 16-7 A deferred tax liability (or asset) is based on enacted tax rates and laws. Hudson should use the 35% rate, the currently enacted tax rate that will be effective in the year(s) the temporary difference reverses. Calculations are not based on anticipated legislation that would alter the company’s tax rate. Question 16-8 When a change in a tax law or rate occurs, a deferred tax liability or asset must be adjusted to reflect the amount to be paid or recovered in the future. If a deferred tax liability was established with the expectation that the future taxable amount would be taxed at 34%, it would now be adjusted to reflect taxation at 36% instead. The usual practice of recalculating the desired balance in a deferred tax liability each period and comparing that amount with any previously existing balance automatically takes into account tax rate changes. The effect is 4 reflected in operating income (adjustment to income tax expense) in the year of the enactment of the change in the tax law or rate. 5 Answers to Questions (continued) Question 16-9 The income tax benefit of either an operating loss carryback or an operating loss carryforward is recognized for accounting purposes in the year the operating loss occurs. The net after-tax operating loss reflects the reduction of past taxes from the loss carryback or future tax savings that the loss carryforward is expected to create. An operating loss carryforward creates future deductible amounts, so a deferred tax asset is recognized for an operating loss carryforward. The deferred tax asset is then reduced by a valuation allowance if it is “more likely that not” that some portion or all of the deferred tax asset will not be realized due to insufficient taxable income expected in the carryforward years. Question 16-10 Deferred tax assets and deferred tax liabilities are not reported individually, but combined instead into a net current amount and a net noncurrent amount. Each is reported as either an asset – if deferred tax assets exceed deferred tax liabilities, or as a liability – if deferred tax liabilities exceed deferred tax assets. Deferred tax assets and deferred tax liabilities are classified as either current or noncurrent according to how the related assets or liabilities are classified for financial reporting. For instance, a deferred tax liability arising from estimated warranty expenses would be classified as current if the warranty liability is classified as current. A deferred tax asset or liability that is not related to a specific asset or liability should be classified according to when the underlying temporary difference is expected to reverse. Question 16-11 Regarding deferred tax amounts reported in the balance sheet, disclosure notes should indicate (a) the total of all deferred tax liabilities, (b) the total of all deferred tax assets, (c) the total valuation allowance recognized for deferred tax assets, (d) the net change in the valuation allowance, and (e) the approximate tax effect of each type of temporary difference (and carryforward). Question 16-12 Pertaining to the income tax expense reported in the income statement, disclosure notes should indicate (a) the current portion of the tax expense (or tax benefit), (b) the deferred portion of the tax expense (or tax benefit), with separate disclosure of amounts attributable to (c) the portion that does not include the effect of the following separately disclosed amounts, (d) operating loss carryforwards, (e) adjustments due to changes in tax laws or rates, (f) adjustments to the beginning-of-the-year valuation allowance due to revised estimates, (g) investment tax credits. Question 16-13 Intraperiod tax allocation means the total income tax obligation for a reporting period is allocated among the income statement items that gave rise to the income tax. The following items should be reported net of their respective income tax effects: • Income (or loss) from continuing operations • Discontinued operations • Extraordinary items 6 Answers to Questions (concluded) Question 16-14 Some accountants contend that the tax liability for certain recurring events will never be paid because such temporary differences recur frequently and new originating differences more than offset reversing differences. This causes the balance in the deferred tax liability account to continually get larger and never require payment. Therefore temporary differences for recurring items like temporary differences due to depreciation do not represent liabilities. Since no future tax payment will be required, no liability should be recorded. The counter argument that supports the FASB’s view is that, although the aggregate amount of a deferred tax liability (such as that for depreciation differences) may get larger, the deferred tax liability for a specific temporary difference (such as for a particular depreciable asset) usually does require payment. This situation is similar to the total balance of accounts payable growing larger each year, but specific accounts payable requiring payment as they come due. 7 BRIEF EXERCISES Brief Exercise 16-1 Since taxable income is less than accounting income, a future taxable amount will occur when the temporary difference reverses. This means a deferred tax liability should be recorded to reflect the future tax consequences of the temporary difference: ($ in millions) Income tax expense (to balance) 4.0 Deferred tax liability ([$10 - 7] x 40%) 1.2 Income tax payable ($7 x 40%) 2.8 Brief Exercise 16-2 Since taxable income is more than accounting income, a future deductible amount will occur when the temporary difference reverses. This means a deferred tax asset should be recorded to reflect the future tax savings from the temporary difference: ($ in millions) Income tax expense (to balance) 4.0 Deferred tax asset ([$12 - 10] x 40%) .8 Income tax payable ($12 x 40%) 4.8 Brief Exercise 16-3 ($ in millions) Income tax expense (to balance) 52 Deferred tax asset ($50 x 40%) 20 Income tax payable ($180 x 40%) 72 8 Brief Exercise 16-4 ($ in millions) Income tax expense (to balance) 84 Deferred tax asset ([$20 – [$40 x 40%]) 4 Income tax payable ($200 x 40%) 80 Brief Exercise 16-5 ($ in millions) Income tax expense (to balance) 2 Deferred tax asset ($30 x 40%) 12 Income tax payable ($35 x 40%) 14 Income tax expense 3 Valuation allowance – deferred tax asset (1/4 x $12) 3 Brief Exercise 16-6 Deferred tax assets are recognized for all deductible temporary differences and operating loss carryforwards. Deferred tax assets are then reduced by a valuation allowance if it is “more likely that not” that some portion or all of the deferred tax assets will not be realized. That would be the case if management feels taxable income will not be sufficient in future years to permit gaining the benefit of reducing taxable income by the future deductible amounts. This apparently is the case with Hypercom, which reported large losses in 2003 and prior years, perhaps indicative of insufficient taxable income in coming years to benefit from the tax savings. 9 Brief Exercise 16-7 Since tax depreciation to date has been $100,000 more than depreciation for financial reporting purposes, a future taxable amount will occur when the temporary difference reverses. This means a deferred tax liability should be reported to reflect the future tax consequences of the temporary difference. At this point, that amount is $100,000 times 40%, or $40,000. If the balance was $32,000 last year, we need an increase of $8,000. The entry to record income taxes is: Income tax expense (to balance) 1,608,000 Deferred tax liability ($40,000 – 32,000) 8,000 Income tax payable ($4,000,000 x 40%) 1,600,000 Brief Exercise 16-8 Since taxable income to date has been $40 million less than pretax accounting income because of the temporary difference, a future taxable amount of $40 million will occur when the temporary difference reverses. This means a deferred tax liability should be reported to reflect the future tax consequences of the temporary difference. That amount is $40 million times 40%, or $16 million. 10 Brief Exercise 16-9 Current year Future taxable amount Accounting income $ 900,000 Non-temporary difference: Municipal bond interest (20,000) Temporary difference: Depreciation (120,000)* $120,000 Taxable income $ 760,000 Enacted tax rate 40% 40% Tax payable currently $ 304,000 Deferred tax liability $ 48,000 Journal entry Income tax expense (to balance) 352,000 Deferred tax liability ($120,000 x 40%) 48,000 Income tax payable (determined above) 304,000 * tax depreciation: $800,000 x 40% $320,000 straight-line depreciation: $800,000 / 4 years 200,000 difference the first year $120,000 11 Brief Exercise 16-10 ($ in 000s) Current Future Year Deductible 2006 Amounts Total 2007 2008 2009 Accounting income 291 Temporary difference: Warranty expense 9 (3) (3) (3) Taxable income 300 Enacted tax rate 40% 40% 30% 30% Tax payable currently 120 Deferred tax asset (1.2) (.9) (.9) (3) Journal entry at the end of 2006 Income tax expense (to balance) 117 Deferred tax asset (determined above) 3 Income tax payable ($300 x 40%) 120 Brief Exercise 16-11 Superior should reduce its deferred tax liability this year by $4.5 million: ($ in millions) Deferred tax liability last year $8.0 ($20 future taxable amount x 40%) Deferred tax liability this year 3.5 ($10 future taxable amount x 35%) Reduction needed to achieve desired balance $4.5 12 Brief Exercise 16-12 Because the loss year is the Nile.com’s first year of operations, the carryback option is unavailable. The loss is carried forward. Journal entry Deferred tax asset ($15 million x 40%) 6,000,000 Income tax benefit – operating loss 6,000,000 Brief Exercise 16-13 Because the operating loss is less than the previous two years taxable income, AirParts cannot get back all taxes paid those two years. It can reduce taxable income from two years ago by $15 million (to zero) and last year’s taxable income by $10 million and get a refund of $10 million of the taxes paid those years. Journal entry Receivable – income tax refund ($25 million x 40%) 10,000,000 Income tax benefit – operating loss 10,000,000 13 Brief Exercise 16-14 Intraperiod tax allocation means the total income tax obligation for a reporting period is allocated among the income statement items that gave rise to the income tax. The following items should be reported net of their respective income tax effects: • Income (or loss) from ordinary, continuing operations • Discontinued operations • Extraordinary items Southeast Airlines had pre-tax earnings of $55 million before the extraordinary gain of $10 million. Since the company’s tax rate is 40%, the amount of income tax expense that Southeast should report is $55 million x 40%, or $22 million. The extraordinary gain should be reported net of the tax on the gain: $10 million less 40% of $10 million, or $6 million. So, the total income tax obligation of $26 million ($65 million x 40%) is allocated between the income statement items that gave rise to the income tax: $ in millions Income from ordinary operations $22 Extraordinary gain 4 Total $26 14 EXERCISES Exercise 16-1 Since taxable income is less than accounting income, a future taxable amount will occur when the temporary difference reverses. This means a deferred tax liability should be recorded to reflect the future tax consequences of the temporary difference. Income tax expense (to balance) 140,000 Deferred tax liability ([$400,000 - 250,000] x 35%) 52,500 Income tax payable ($250,000 x 35%) 87,500 Exercise 16-2 Income tax expense (to balance) 830,000 Deferred tax asset ($300,000 x 40%) 120,000 Income tax payable (given) 950,000 Exercise 16-3 Income tax expense (to balance) 30,035,000 Deferred tax asset ([$1 million x 40%] - $435,000) 35,000 Income tax payable ($75 million x 40%) 30,000,000 15 Exercise 16-4 Requirement 1 ($ in millions) Current Future Year Deductible 2006 Amounts Temporary difference: (70) Taxable income 180 Enacted tax rate 40% 40% Tax payable currently 72 Deferred tax asset (28) ↓ Deferred tax asset: Ending balance (balance currently needed) $ 28 Less: beginning balance ($75 x 40%) (30) Change needed to achieve desired balance $( 2) Journal entry at the end of 2006 Income tax expense (to balance) 74 Deferred tax asset (determined above) 2 Income tax payable (determined above) 72 Requirement 2 ($ in millions) Income tax expense (to balance) 74 Deferred tax asset (determined above) 2 Income tax payable (determined above) 72 Income tax expense 14 Valuation allowance – deferred tax asset (1/2 x $28) 14 16 Of course, these two entries can be combined. 17 Exercise 16-5 Requirement 1 ($ in millions) Current Future Year Deductible 2006 Amounts Temporary difference: (70) Taxable income 180 Enacted tax rate 40% 40% Tax payable currently 72 Deferred tax asset (28) ↓ Deferred tax asset: Ending balance (balance currently needed) $ 28 Less: beginning balance ($75 x 40%) (30) Change needed to achieve desired balance $( 2) Journal entries at the end of 2006 Income tax expense (to balance) 74 Deferred tax asset (determined above) 2 Income tax payable (determined above) 72 Valuation allowance – deferred tax asset 10 Income tax expense 10 Of course, these two entries can be combined. 18 Exercise 16-5 (concluded) Requirement 2 ($ in millions) Income tax expense (to balance) 74 Deferred tax asset (determined above) 2 Income tax payable (determined above) 72 Income tax expense 4 Valuation allowance – deferred tax asset ([1/2 x $28]– $10) 4 Of course, these two entries can be combined. 19 Exercise 16-6 Requirement 1 ($ in millions) Current Future Year Taxable 2006 Amount [total] Accounting income 20 Temporary difference: Depreciation ($30 - 20) - ($28 - 13) = (5) 15 ($28 - 13) Taxable income 15 Enacted tax rate 40% 40% Tax payable currently 6 Deferred tax liability 6 ↓ Deferred tax liability: Ending balance (balance currently needed) $ 6 Less: beginning balance ($30 - 20) x 40% (4) Change needed to achieve desired balance $ 2 Journal entry at the end of 2006 Income tax expense (to balance) 8 Deferred tax liability (determined above) 2 Income tax payable (determined above) 6 Requirement 2 ($ in millions) Pretax accounting income $20 Income tax expense (8) Net income $12 Exercise 16-7 1. d 2. d 3. a 4. c 20 Exercise 16-8 ($ in millions) December 31 2006 2007 2008 2009 Depreciable asset (net): Accounting basis $80 (20) $60 (20) $40 (20) $20 (20) $0 Tax basis 80 (25) 55 (33) 22 (15) 7 (7) 0 TEMPORARY DIFFERENCE 5 $ 5 13 $18 (5) $13 (13) $0 Tax rate 40% 40% 40% 40% DEFERRED TAX LIABILITY $ 2 $7.2 $ 5.2 $0 ↑ ↑ ↑ ↑ originating reversing differences differences 21 Exercise 16-9 D 1. Accrual of loss contingency, tax-deductible when paid. D 2. Newspaper subscriptions; taxable when received, recognized for financial reporting when earned. T 3. Prepaid rent, tax-deductible when paid. D 4. Accrued bond interest expense; tax-deductible when paid. T 5. Prepaid insurance, tax-deductible when paid. D 6. Unrealized loss from recording investments available for sale at fair market (tax-deductible when investments are sold). D 7. Bad debt expense; allowance method for financial reporting; direct write-off for tax purposes. D 8. Advance rent receipts on an operating lease (as the lessor), taxable when received. T 9. Straight-line depreciation for financial reporting; accelerated depreciation for tax purposes. D 10. Accrued expense for employee postretirement benefits; tax- deductible when subsequent payments are made. 22 Exercise 16-10 1. Liability – loss contingency 2. Liability – subscriptions 3. Prepaid rent 4. Accrued bond interest payable 5. Prepaid insurance 6. Unrealized loss on investments (shareholders’ equity account) 7. Allowance for uncollectible accounts; and thus accounts receivable (net) 8. Liability – unearned rent 9. Accumulated depreciation; and thus depreciable assets (net) 10. Liability – postretirement benefits 23 Exercise 16-11 Requirement 1 ($ in thousands) Current Future Future Year Taxable Taxable 2006 Amounts Amounts 2007 2008 2009 Accounting income 300 Non-temporary difference: Municipal bond interest (40) Temporary difference: Depreciation (10) (2) 2 10 10 Taxable income 250 Enacted tax rate 40% 40% Tax payable currently 100 Deferred tax liability 4 ↓ Deferred tax liability: Ending balance (balance currently needed) $ 4 Less: beginning balance 0 Change needed to achieve desired balance $ 4 Journal entry at the end of 2006 Income tax expense (to balance) 104 Deferred tax liability (determined above) 4 Income tax payable (determined above) 100 Requirement 2 ($ in thousands) Pretax accounting income $300 Income tax expense (104) Net income $196 24 Exercise 16-12 Requirement 1 ($ in millions) Current Future Future Year Taxable Taxable 2006 Amounts Amounts 2007 2008 [total] Accounting income 63 Non-temporary difference: Goodwill amortization (3) Temporary difference: Plot sales (40) 24 16 40 Taxable income 20 Enacted tax rate 40% 40% Tax payable currently 8 Deferred tax liability 16 ↓ Deferred tax liability: Ending balance (balance currently needed) $ 16 Less: beginning balance (0) Change needed to achieve desired balance $16 Journal entry at the end of 2006 Income tax expense (to balance) 24 Deferred tax liability (determined above) 16 Income tax payable (determined above) 8 Requirement 2 ($ in millions) Pretax accounting income $63 Income tax expense (24) Net income $39 25 Exercise 16-13 Requirement 1 ($ in millions) Current Future Year Deductible 2006 Amounts Total 2007 2008 2009 2010 Accounting income 14 Temporary difference: Warranty expense 6 (2) (1) (1) (2) Taxable income 20 Enacted tax rate 35% 30% 30% 30% 25% Tax payable currently 7 Deferred tax asset (0.6) (0.3) (0.3) (0.5) (1.7) ↓ Deferred tax asset: Ending balance (balance currently needed) $ 1.7 Less: beginning balance (0.0) Change needed to achieve desired balance $1.7 Journal entry at the end of 2006 Income tax expense (to balance) 5.3 Deferred tax asset (determined above) 1.7 Income tax payable (determined above) 7.0 Requirement 2 ($ in millions) Pretax accounting income $14.0 Income tax expense (5.3) Net income $ 8.7 26 Exercise 16-14 Requirement 1 ($ in millions) Current Future Future Year Taxable Taxable 2006 Amounts Amounts 2007 2008 2009 2010 [total] Accounting income 33 Temporary difference: Advance rent payment (8) 2 2 2 2 8 Taxable income 25 Enacted tax rate 40% 40% Tax payable currently 10 Deferred tax liability 3.2 ↓ Deferred tax liability: Ending balance (balance currently needed) $3.2 Less: beginning balance 0.0 Change needed to achieve desired balance $3.2 Journal entry at the end of 2006 Income tax expense (to balance) 13.2 Deferred tax liability (determined above) 3.2 Income tax payable (determined above) 10.0 27 Exercise 16-14 (continued) Requirement 2 ($ in millions) Current Future Future Year Taxable Taxable 2007 Amounts Amounts 2008 2009 2010 [total] Accounting income 50 Temporary difference: Advance rent payment 2 2 2 2 6 Taxable income 52 Enacted tax rate 40% 40% Tax payable currently 20.8 Deferred tax liability 2.4 ↓ Deferred tax liability: Ending balance (balance currently needed) $ 2.4 Less: beginning balance (3.2) Change needed to achieve desired balance $(0.8) Journal entry at the end of 2007 Income tax expense (to balance) 20.0 Deferred tax liability (determined above) 0.8 Income tax payable (determined above) 20.8 28 Exercise 16-14 (concluded) Requirement 3 ($ in millions) Current Future Future Year Taxable Taxable 2007 Amounts Amounts 2008 2009 2010 [total] Accounting income 50 Temporary difference: Advance rent payment 2 2 2 2 6 Taxable income 52 Enacted tax rate 40% 30% Tax payable currently 20.8 Deferred tax liability 1.8 ↓ Deferred tax liability: Ending balance (balance currently needed) $ 1.8 Less: beginning balance (3.2) Change needed to achieve desired balance $(1.4) Journal entry at the end of 2007 Income tax expense (to balance) 19.4 Deferred tax liability (determined above) 1.4 Income tax payable (determined above) 20.8 Requirement 4 Without the change income tax expense in 2007 [requirement 2] is $20 million. However, when the tax rate changes to 30%, the deferred tax liability must be reduced to reflect the fact that future taxable amounts will be taxed at a lower rate than the rate assumed when the liability was recorded in 2006. The adjustment is the future taxable amount, $6 million, times the rate change, 40% – 30%, or $0.6 million. SFAS 109 requires that the adjustment be reflected in operating income in the year of the change. Application of the asset/liability approach automatically accomplishes that goal. The income tax expense with the change in 2007 [requirement 3] is $19.4 million ($20 – 0.6 million). 29 Exercise 16-15 A deferred tax liability is established using the currently enacted tax rate for the year(s) a temporary difference is expected to reverse. In this case that rate was 40%. The change in the tax law in 2007 constitutes a change in estimate. The deferred tax liability is simply revised to reflect the new rate. ($ in millions) Income tax expense (to balance) ................................................ 10 Deferred tax liability ($20 million x [40% – 30%]) ....................... 2 Income tax payable ($30 million x 40%) ................................. 12 When a company revises a previous estimate, prior financial statements are not revised. No adjustment is made to existing accounts. A disclosure note should describe the effect of a change in estimate on income before extraordinary items, net income, and related per-share amounts for the current period. Exercise 16-16 Income tax expense (to balance) ................................................ 32,000 Deferred tax asset ($12,000 x 40%) ............................................ 4,800 Deferred tax liability ($77,000 x 40%) ................................... 30,800 Income tax payable ($15,000 x 40%) ...................................... 6,000 30 Exercise 16-17 Requirement 1 ($ in millions) Income tax expense (to balance) ................................................ 80 Deferred tax asset ($25 million x 40%) ....................................... 10 Deferred tax liability ($80 million x 40%) ............................... 32 Income tax payable ($145 million x 40%) ............................... 58 Requirement 2 ($ in millions) Pretax accounting income $200 Income tax expense (80) Net income $120 31 Exercise 16-18 ($ in thousands) Situation 1 2 3 4 a. Taxable income $ 85 $215 $195 $260 Tax rate 40% 40% 40% 40% Income tax payable $ 34 $ 86 $ 78 $104 b. Future deductible amounts $(15) $(20) $(20) Tax rate 40% 40% 40% 40% Deferred tax asset - bal. $ (6) 0 $ (8) $ (8) Beginning of the year: 2 0 9 4 c. Deferred tax asset: (dr) cr $ (4) 0 $ 1 $ (4) d. Future taxable amounts $15 $15 $30 Tax rate 40% 40% 40% 40% Deferred tax liability - bal. $ 0 $ 6 $ 6 $12 Beginning of the year: 0 2 2 0 e. Deferred tax liability: (dr) cr $ 0 $ 4 $ 4 $12 f. Income tax payable currently $34 $ 86 $78 $104 Deferred tax asset: (dr) cr (4) 0 1 (4) Deferred tax liability: (dr) cr 0 4 4 12 Income tax expense $30 $90 $83 $112 32 Exercise 16-19 1 2 3 4 5 6 7 8 ACCOUNTING INCOME $100 $100 $100 $100 $100 $100 $100 $100 Temporary differences: Income statement first: Revenue (20) (15) (15) (15) Expense 20 20 20 20 20 Tax return first: Revenue 20 15 5 Expense (20) (10) (10) TAXABLE INCOME $120 $80 $120 $80 $105 $135 $95 $100 33 Exercise 16-20 Requirement 1 ($ in thousands) Current Future Future Year Taxable Deductible 2006 Amounts Amounts Accounting income 977 Non-temporary difference: Municipal bond interest (32) Temporary differences: Depreciation (55) 85 Warranty expense 10 (10) Taxable income 900 Enacted tax rate 40% 40% 40% Tax payable currently 360 Deferred tax liability 34 Deferred tax asset (4) ↓ ↓ Deferred tax Deferred tax liability asset Ending balances (balances currently needed): $34 $ 4 Less: beginning balances: (12) (0) Change needed to achieve desired balances $22 $ 4 Journal entry at the end of 2006 Income tax expense (to balance) 378 Deferred tax asset (determined above) 4 Deferred tax liability (determined above) 22 Income tax payable (determined above) 360 Requirement 2 ($ in thousands) Pretax accounting income $ 977 Income tax expense (378) Net income $599 34 Exercise 16-21 Requirement 1 Because the loss year is the company’s first year of operations, the carryback option is unavailable. The loss is carried forward. ($ in thousands) Current Future Year Deductible 2006 Amounts [total] Operating loss (375) Loss carryforward 375 (375) 0 Enacted tax rate 40% 40% Tax payable 0 Deferred tax asset (150) ↓ Deferred tax asset: Ending balance (balance currently needed) $ 150 Less: beginning balance (0) Change needed to achieve desired balance $150 Journal entry at the end of 2006 Deferred tax asset (determined above) 150 Income tax benefit – operating loss (to balance) 150 Since the weight of available evidence suggests future taxable income sufficient to benefit from future deductible amounts from the operating loss carryforward, no valuation allowance is needed. Requirement 2 ($ in thousands) Operating loss before income taxes $375 Less: Income tax benefit – operating loss (150) Net operating loss $225 35 Exercise 16-22 Requirement 1 ($ in thousands) Current Prior Years Year 2004 2005 2006 Operating loss (100) Loss carryback (80) (20) 100 0 Enacted tax rate 40% 45% 40% Tax payable (refundable) (32) (9) 0 Journal entry at the end of 2006 Receivable – income tax refund ($32 + 9) 41 Income tax benefit – operating loss 41 Requirement 2 ($ in thousands) Operating loss before income taxes $100 Less: Income tax benefit from loss carryback (41) Net operating loss $ 59 36 Exercise 16-23 Requirement 1 ($ in thousands) Current Future Prior Years Year Deductible 2004 2005 2006 Amounts [total] Operating loss (160) Loss carryback (80) (60) 140 Loss carryforward 20 (20) 0 Enacted tax rate 40% 45% 40% 40% Tax payable (refundable) (32) (27) 0 Deferred tax asset (8) ↓ Deferred tax asset: Ending balance (balance currently needed) $ 8 Less: beginning balance (0) Change needed to achieve desired balance $8 Journal entry at the end of 2006 Receivable – income tax refund ($32 + 27) 59 Deferred tax asset (determined above) 8 Income tax benefit – operating loss (to balance) 67 Requirement 2 ($ in thousands) Operating loss before income taxes $160 Less: Income tax benefit: Tax refund from loss carryback $59 Future tax savings from loss carryforward 8 (67) Net operating loss $ 93 37 Exercise 16-24 ($ in millions) Future Deferred Classification Taxable Tax (Asset) Related Balance current-C (Deductible) Tax Liability Sheet Account noncurrent-N Amounts Rate C N Liability – warranty expense C (15) x 40% (6) Depreciable assets N 120 x 40% 48 Receivable – installment sales C 10 x 40% 4 Receivable – installment sales N 40 x 40% 16 Allowance – uncollectible accounts C (25) x 40% (10) Net current liability (asset) (12) Net noncurrent liability (asset) 64 Current Assets: Deferred tax asset $12 Long-Term Liabilities: Deferred tax liability $64 Note: Before offsetting assets and liabilities within the current and noncurrent categories, the total deferred tax assets is $16 ($6+10) and the total deferred tax liabilities is $68 ($4+48+16). 38 Exercise 16-25 Requirement 1 ($ in thousands) Current Future Year Taxable 2006 Amounts 2007 2008 2009 Accounting income 810 Non-temporary difference (10) Temporary difference: Installment sales (600) 150 250 200 Taxable income 200 Enacted tax rate 30% 30% 40% 40% Tax payable currently 60 Deferred tax liability 45 100 80 225 ↓ Deferred tax liability: Ending balance (balance currently needed) $225 Less: beginning balance (0) Change needed to achieve desired balance $225 Journal entry at the end of 2006 Income tax expense (to balance) 285 Deferred tax liability (determined above) 225 Income tax payable (determined above) 60 Requirement 2 ($ in thousands) Pretax accounting income $ 810 Income tax expense (285) Net income $525 39 Exercise 16-25 (concluded) Requirement 3 In a classified balance sheet, deferred tax assets and deferred tax liabilities are classified as either current or noncurrent according to how the related assets or liabilities are classified for financial reporting. The deferred tax liability arising from installment sales would be classified as part current and part noncurrent because the related installment receivable would properly be classified as part current and part noncurrent. Since there are no other temporary differences, this is the only deferred tax liability: Current Liabilities: Deferred tax liability $45,000 Long-Term Liabilities: Deferred tax liability $180,000 ($100,000 + 80,000) 40 Exercise 16-26 Requirement 1 ($ in thousands) Current Future Taxable Deferred Year (Deductible) Tax 2006 Amounts Liab. Asset 2007 2008 2009 Accounting income 810 Non-temporary difference (10) Temporary differences: Installment sales (600) 150 250 200 30% 40% 40% Deferred tax liability 45 100 80 225 Warranty expense 60 (20) (25) (15) 30% 40% 40% Deferred tax asset (6) (10) (6) (22) Taxable income 260 Enacted tax rate 30% Tax payable currently 78 ↓ ↓ Deferred Tax Liab. Asset Ending balances (balances currently needed): $225 $22 Less: beginning balances: 0 0 Change needed to achieve desired balances $225 $22 Journal entry at the end of 2006 Income tax expense (to balance) 281 Deferred tax asset (determined above) 22 Deferred tax liability (determined above) 225 Income tax payable (determined above) 78 41 Exercise 16-26 (concluded) Requirement 2 ($ in thousands) Pretax accounting income $810 Income tax expense (281) Net income $529 Requirement 3 In a classified balance sheet, deferred tax assets and deferred tax liabilities are classified as either current or noncurrent according to how the related assets or liabilities are classified for financial reporting. Both the deferred tax liability arising from installment sales and deferred tax asset arising from warranties would be classified as part current and part noncurrent because the related installment receivable and estimated warranty liability would properly be classified as part current and part noncurrent. The deferred tax liabilities and deferred tax assets are offset to get the net current and the net noncurrent amounts: Current Liabilities: Deferred tax liability $39,000 ($45,000 - 6,000) Long-Term Liabilities: Deferred tax liability $164,000 ([$100,000 + 80,000] – [10,000 + 6,000]) 42 Exercise 16-27 L 1. Advance payments on an operating lease deductible when paid. A 2. Estimated warranty costs, tax deductible when paid. A 3. Rent revenue collected in advance; cash basis for tax purposes. N 4. Interest received from investments in municipal bonds. L 5. Prepaid expenses tax deductible when paid. A 6. Operating loss carryforward. N 7. Operating loss carryback. A 8. Bad debt expense; allowance method for accounting; direct write-off for tax. A 9. Organization costs expensed when incurred; tax deductible over 15 years. N 10. Life insurance proceeds received upon the death of the company president. Exercise 16-28 List A List B g 1. No tax consequences a. Deferred tax liability e 2. Originates, then reverses b. Deferred tax asset h 3. Revise deferred tax amounts c. 2 years l 4. Operating loss d. Current and deferred tax a 5. Future tax effect of prepaid expenses consequence combined tax deductible when paid e. Temporary difference c 6. Loss carryback f. Specific tax rates times amounts b 7. Future tax effect of estimated reversing each year warranty expense g. Non temporary differences j 8. Valuation allowance h. When enacted tax rate changes f 9. Phased-in change in rates i. Same as related asset or liability i 10. Balance sheet classifications j. “More likely than not” test 43 k 11. Individual tax consequences of k. Intraperiod tax allocation financial statement components l. Negative taxable income d 12. Income tax expense Exercise 16-29 Income Statement For the fiscal year ended March 31, 2006 ($ in millions) Revenues $830 Cost of goods sold (350) Gross profit $480 Operating expenses (180) Income from continuing operations before income taxes $300 Income tax expense (120) Income before discontinued operations and extraordinary item $180 Loss from discontinued operations, less applicable income taxes of $30 (45) Extraordinary casualty loss, less applicable income taxes of $4 (6) Net income $129 44 Exercise 16-30 1. c. A deferred tax asset records the deferred tax consequences attributable to deductible temporary differences and carryforwards. Advance rental receipts accounted for on the accrual basis for financial statement purposes and on a cash basis for tax purposes would give rise to a deferred tax asset. The financial statements would report no income and no related tax expense because the rental payments apply to future periods. The tax return, however, would treat the rent as income when the cash was received, and a tax would be due in the year of receipt. Because the tax is paid prior to recording the income for financial statement purposes, it represents an asset that will be recognized as an expense when income is finally recorded. 2. d. For financial reporting purposes, the reported amount (cost – accumulated depreciation of the machine at year-end, assuming straight- line depreciation and no salvage value, will be $80,000 [$100,000 cost – ($100,000 / 5 years)]. The tax basis of this asset will be $66,670 [$100,000 (33.33% x $100,000)]. A taxable temporary difference has arisen because the excess of the reported amount over the tax basis will result in a net future taxable amount over the recovery period. A taxable temporary difference requires recognition of a deferred tax liability, Assuming the 35% rate applies during the asset’s entire life, the deferred tax liability equals the applicable enacted tax rate times the temporary difference, or $4,666 [35% x ($80,000 - $66,670)]. 3. d. When one tax rate does not apply to all relevant years, a more complex calculation is necessary. In this question, different rates apply during the recovery period. During the years 2008-2010, book depreciation will equal $60,000 [3 x ($100,000 / 5)], and tax depreciation will equal $66,670 (the tax basis at December 31, 2007, will be recovered in full by December 31, 2010). Based on the applicable enacted 40% tax rate, the net deferred tax liability for 2008-2010 will be $2,668 [40% x ($66,670 - $60,000)]. However, the excess of book over tax depreciation in 2004 will be $20,000 ($20,000 - $0). Based on the applicable enacted 45% tax rate, the deferred tax liability for 2011 will be $9,000 (45% x $20,000). Accordingly, the net deferred tax liability at December 31, 2007, is $6,332 ($9,000 - $2,668). 45 PROBLEMS Problem 16-1 Requirement 1 ($ in millions) Future Future Temporary Differences Taxable Deductible Amounts Amounts Accounts receivable (net of allowance) $ (2) Prepaid insurance $ 20 Prepaid rent expense (operating lease) 6 Buildings and equipment (net) 80 Liability – subscriptions received (14) Liability – postretirement benefits (594) Unrealized gain 4 Totals $110 $(610) Tax rate 40% 40% Deferred tax liability $ 44 Deferred tax asset $(244) Requirement 2 Deferred tax Deferred tax liability asset Ending balances (balances currently needed): $ 44 $244 Less: beginning balances: (40) (250) Change needed to achieve desired balances $ 4 $ (6) Requirement 3 Taxable income times tax rate equals income tax payable $120 million x 40% = $48 million 46 Problem 16-1 (concluded) Requirement 4 Income tax expense (to balance) 58 Deferred tax asset (determined above) 6 Deferred tax liability (determined above) 4 Income tax payable (determined above) 48 Requirement 5 ($ in millions) Future Deferred Classification Taxable Tax (Asset) Related Balance current-C (Deductible) Tax Liability Sheet Account noncurrent-N Amounts Rate C N Allowance–uncollectible accounts C (2) x 40% (0.8) Prepaid insurance C 20 x 40% 8.0 Prepaid rent C 6 x 40% 2.4 Buildings and equipment N 80 x 40% 32.0 Liability–subscriptions received C (14) x 40% (5.6) Liability–postretirement benefits N (594) x 40% (237.6) Unrealized gain on investments N 4 x 40% 1.6 ___ __ Net current liability (asset) 4.0 Net noncurrent liability (asset) (204.0) Current Liabilities: Deferred tax liability $ 4 Other assets: Deferred tax asset $204 RECONCILIATION [NOT REQUIRED]: Deferred tax liability $ (4) Deferred tax asset 204 $200 Total amounts from requirement 1: Deferred tax liability $ (44) Deferred tax asset 244 $200 47 Problem 16-2 Requirement 1 A liability for unearned subscription revenue is created when subscriptions are received (debit: cash, credit: liability - subscriptions). For tax purposes, no such liability is recorded. This causes a temporary difference between the financial statement carrying amount of the subscription liability and its tax basis. Requirement 2 ($ in millions) December 31 2006 2007 2008 Liability – subscriptions: $ 0 $ 40 $ 20 (250) (240) (230) 290 220 260 Accounting basis $40 $20 $50 Tax basis 0 0 0 TEMPORARY DIFFERENCE $40 $ 20 $ 50 Requirement 3 TEMPORARY DIFFERENCE $40 $ 20 $ 50 Tax rate x 40% x 40% x 40% DEFERRED TAX ASSET $ 16 $ 8 $ 20 Requirement 4 Because these 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. It would be reported in a classified balance sheet as a current asset. 48 Problem 16-3 Requirement 1 ($ in millions) Current Future Future Year Taxable Taxable 2006 Amounts Amounts 2007 2008 2009 [total] Accounting income 16 Temporary difference: Lot sales (12) 4 5 3 12 Taxable income 4 Enacted tax rate 40% 40% Tax payable currently 1.6 Deferred tax liability 4.8 ↓ Deferred tax liability: Ending balance (balance currently needed) $ 4.8 Less: beginning balance (0.0) Change needed to achieve desired balance $4.8 Journal entry at the end of 2006 Income tax expense (to balance) 6.4 Deferred tax liability (determined above) 4.8 Income tax payable (determined above) 1.6 49 Problem 16-3 (concluded) Requirement 2 ($ in millions) Current Future Future Year Taxable Taxable 2007 Amounts Amounts 2008 2009 [total] Accounting income 15 Temporary difference: Lot sales 4 5 3 8 Taxable income 19 Enacted tax rate 40% 35% Tax payable currently 7.6 Deferred tax liability 2.8 ↓ Deferred tax liability: Ending balance (balance currently needed) $ 2.8 Less: beginning balance (4.8) Change needed to achieve desired balance $(2.0) Journal entry at the end of 2007 Income tax expense (to balance) 5.6 Deferred tax liability (determined above) 2.0 Income tax payable (determined above) 7.6 Requirement 3 The balance in the deferred tax liability account at the end of 2007 would have been $3.2 million if the new tax rate had not been enacted: Future taxable amounts $ 8 million Previous tax rate 40% Deferred tax liability $3.2 million The effect of the change is included in income tax expense, because income tax expense is less than it would have been if the rate had not changed. 50 Problem 16-4 2006 2007 2008 2009 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 30% 30% 40% 40% Tax payable $ 6,120 $ 8,160 $20,800 $24,160 Cumulative Temporary 2006 2007 2008 2009 Difference Straight-line 30,000 30,000 30,000 30,000 Tax depreciation (39,600) (52,800) (18,000) (9,600) Temporary differences: (9,600) (22,800) 12,000 20,400 0 2006 (22,800) 12,000 20,400 $ 9,600 2007 12,000 20,400 $32,400 2008 20,400 $20,400 2009 0 2006 2007 2008 2009 Cumulative difference $ 9,600 $32,400 $20,400 $ 0 Tax rate 30% 40% 40% 40% Year-end balance $ 2,880 $12,960 $ 8,160 $ 0 Previous balance 0 (2,880) (12,960) (8,160) Credit / (debit) $ 2,880 $10,080 $ (4,800) $(8,160) 51 Problem 16-4 (concluded) Journal entry at the end of 2006 Income tax expense (to balance) 9,000 Deferred tax liability (determined above) 2,880 Income tax payable (determined above) 6,120 Journal entry at the end of 2007 Income tax expense (to balance) 18,240 Deferred tax liability (determined above) 10,080 Income tax payable (determined above) 8,160 Journal entry at the end of 2008 Income tax expense (to balance) 16,000 Deferred tax liability (determined above) 4,800 Income tax payable (determined above) 20,800 Journal entry at the end of 2009 Income tax expense (to balance) 16,000 Deferred tax liability (determined above) 8,160 Income tax payable (determined above) 24,160 52 Problem 16-5 2006 2007 2008 2009 Pretax accounting income $350,000 $270,000 $340,000 $380,000 Installment sale (50,000) 20,000 25,000 5,000 Municipal bond interest (15,000) Taxable Income $300,000 $290,000 $350,000 $385,000 Tax rate 30% 30% 25% 25% Income tax payable $ 90,000 $ 87,000 $ 87,500 $ 96,250 Cumulative Temporary 2006 2007 2008 2009 Difference Temporary difference: (50,000) 20,000 25,000 5,000 = 0 2006 20,000 25,000 5,000 = $50,000 2007 25,000 5,000 = $30,000 2008 5,000 = $ 5,000 2009 0 2006 2007 2008 2009 Cumulative difference $50,000 $30,000 $ 5,000 $ 0 Tax rate 30% 25% 25% 25% Year-end balance $15,000 $ 7,500 $ 1,250 0 Previous balance 0 (15,000) (7,500) (1,250) Credit / (debit) $15,000 $ (7,500) $(6,250) $(1,250) 53 Problem 16-5 (concluded) Journal entry at the end of 2006 Income tax expense (to balance) 105,000 Deferred tax liability (determined above) 15,000 Income tax payable (determined above) 90,000 Journal entry at the end of 2007 Income tax expense (to balance) 79,500 Deferred tax liability (determined above) 7,500 Income tax payable (determined above) 87,000 Journal entry at the end of 2008 Income tax expense (to balance) 81,250 Deferred tax liability (determined above) 6,250 Income tax payable (determined above) 87,500 Journal entry at the end of 2009 Income tax expense (to balance) 95,000 Deferred tax liability (determined above) 1,250 Income tax payable (determined above) 96,250 54 Problem 16-6 Requirement 1 ($ in millions) Income tax expense (to balance) 16.4 Deferred tax asset ($6 million x 40%) 2.4 Deferred tax liability ($39 million x 40%) 15.6 Income tax payable ($8 million x 40%) 3.2 Requirement 2 In a classified balance sheet, deferred tax assets and deferred tax liabilities are classified as either current or noncurrent according to how the related assets or liabilities are classified for financial reporting. The deferred tax liabilities and deferred tax assets are offset to get the net current and the net noncurrent amounts: ($ in millions) Future Deferred Classification Taxable Tax (Asset) Related Balance current-C (Deductible) Tax Liability Sheet Account noncurrent-N Amounts Rate C N Liability – loss contingency N (6) x 40% (2.4) Depreciable assets N 30 x 40% 12.0 Prepaid insurance C 9 x 40% 3.6 ___ ___ Net current liability (asset) 3.6 Net noncurrent liability (asset) 9.6 Current Liabilities: Deferred tax liability $3.6 Long-Term Liabilities: Deferred tax liability $9.6 55 Problem 16-6 (concluded) Requirement 3 ($ in millions) Current Future Taxable Deferred Year (Deductible) Tax 2006 Amounts Liab. Asset 2007 2008 2009 Accounting income 41 Temporary differences: Depreciation (30) (60) 50 40 Prepaid insurance (9) 9 (51) 50 40 40% 35% 35% Deferred tax liability (20.4) 17.5 14 11.1 Loss contingency 6 (6) 35% Deferred tax asset (2.1) (2.1) Taxable income 8 Enacted tax rate 40% Tax payable currently 3.2 ↓ ↓ Deferred Tax Liab. Asset Ending balances (balances currently needed): $11.1 $2.1 Less: beginning balances: (0.0) (0.0) Change needed to achieve desired balances $11.1 $2.1 Journal entry at the end of 2006 Income tax expense (to balance) 12.2 Deferred tax asset (determined above) 2.1 Deferred tax liability (determined above) 11.1 Income tax payable (determined above) 3.2 56 Problem 16-7 Requirement 1 ($ in millions) Future Current Taxable Future Future Year (Deductible) Taxable Deductible 2006 Amounts Amounts Amounts 2007 2008 [total] [total] Accounting income 76 Non-temporary difference: Fine paid 2 Temporary differences: Installment sales (3) 2 2 4 Depreciation (15) 8 13 21 Bad debts 1 (2) (2) Paid future absences 7 (4) (3) (7) Loss contingency (2) Taxable income 66 25 (9) Enacted tax rate 40% 40% 40% Tax payable currently 26.4 Deferred tax liability 10.0 Deferred tax asset (3.6) ↓ ↓ Deferred Tax Liab. Asset Ending balances (balances currently needed): $10.0 $3.6 Less: beginning balances: (2.8) (1.2) Changes needed to achieve desired balances $7.2 $2.4 Journal entry at the end of 2006 Income tax expense (to balance) 31.2 Deferred tax asset (determined above) 2.4 Deferred tax liability (determined above) 7.2 Income tax payable (determined above) 26.4 57 Problem 16-7 (concluded) Requirement 2 ($ in millions) Pretax accounting income $76.0 Income tax expense (31.2) Net income $44.8 58 Requirement 3 ($ in millions) Future Deferred Classification Taxable Tax (Asset) Related Balance current-C (Deductible) Tax Liability Sheet Account noncurrent-N Amounts Rate C N Receivable – installment sales C 2 x 40% .8 Receivable – installment sales N 2 x 40% .8 Depreciable assets N 21 x 40% 8.4 Allowance – uncollectible accounts C (2) x 40% (.8) Liability – paid future absences C (4) x 40% (1.6) Liability – paid future absences N (3) x 40% (1.2) ___ ____ Net current liability (asset) (1.6) Net noncurrent liability (asset) 8.0 Current Assets: Deferred tax asset $1.6 Long-Term Liabilities: Deferred tax liability $8.0 RECONCILIATION [NOT REQUIRED]: Net current asset $ (1.6) Net noncurrent liability 8.0 $6.4 Total amounts from requirement 1: Deferred tax asset $ (3.6) Deferred tax liability 10.0 $6.4 59 Problem 16-8 Requirement 1 The expense for life insurance premiums is a non-temporary difference each year because it’s recognized as an income statement expense, but is not tax- deductible in any year. The others are temporary differences. The temporary differences for casualty insurance expense and the unrealized loss originate in 2005 and reverse in 2006. The temporary difference for subscriptions originates each year and reverses the following year. The temporary difference for the loss contingency originated in 2004 and reverses in 2005. 60 Problem 16-8 (continued) Requirement 2 Current Future Future ($ in millions) Year Taxable Deductible 2005 Amounts Amounts [2006] [2006] Accounting income 128 Non-temporary difference: Life insurance premiums 2 Temporary differences: Casualty insurance expense (30) 30 Subscriptions-2004 (reversing)* (10) Subscriptions-2005 ($33- [$25-10])* 18 (18) Unrealized loss 17 (17) Loss contingency (reversing) (5) Taxable income 120 30 (35) Enacted tax rate 40% 40% 40% Tax payable currently 48 Deferred tax liability 12 Deferred tax asset 14 ↓ ↓ Deferred tax Deferred tax liability asset Ending balances (balances currently needed): $12 $14 Less: beginning balances: 0 (6) Changes needed to achieve desired balances $12 $ 8 Journal entry at the end of 2005 Income tax expense (to balance) 52 Deferred tax asset (determined above) 8 Deferred tax liability (determined above) 12 Income tax payable (determined above) 48 * Temporary difference for subscriptions: 2004 2005 2006 61 Earned in current yr. (reported on income statement) $25 $33 Collected in prior yr., earned in current yr. (reversing difference) (10) (18) Collected in current yr., earned in following yr. (originating difference) $10 18 20 Collected in current yr. (reported on tax return) $33 $35 62 Problem 16-8 (continued) Requirement 3 Because all accounts related to the temporary differences (prepaid insurance, unearned revenues, and short-term investments) are classified as current, the deferred tax amounts will be classified as current also. The net current amount is $2 million [$14 asset – $12 liability]. Since this is a debit difference, it is reported as a current asset. 63 Problem 16-8 (continued) Requirement 4 ($ in millions) Current Future Future Year Taxable Deductible 2006 Amounts Amounts [2007] [2007] Accounting income 183 Non-temporary difference: Life insurance premiums 2 Temporary differences: Casualty insurance (reversing) 30 Subscriptions-2005 (reversing)* (18) Subscriptions-2006 ($35- [33-18])* 20 (20) Unrealized loss (reversing) (17) Taxable income 200 0 (20) Enacted tax rate 40% 40% 40% Tax payable currently 80 Deferred tax liability 0 Deferred tax asset (8) ↓ ↓ Deferred tax Deferred tax liability asset Ending balances (balances currently needed): $ 0 $ 8 Less: beginning balances: (12) (14) Changes needed to achieve desired balances ($12) ($ 6) Journal entry at the end of 2006 Income tax expense (to balance) 74 Deferred tax liability (determined above) 12 Deferred tax asset (determined above) 6 Income tax payable (determined above) 80 * Temporary difference for subscriptions: 2004 2005 2006 64 Earned in current yr. (reported on income statement) $25 $33 Collected in prior yr., earned in current yr. (reversing difference) (10) (18) Collected in current yr., earned in following yr. (originating difference) $10 18 20 Collected in current yr. (reported on tax return) $33 $35 65 Problem 16-8 (concluded) Requirement 5 Because the liability for subscriptions received in advance, related to the only temporary difference, is classified as current, the deferred tax asset will be classified as current also. The deferred tax asset is $8 million and is reported as a current asset. 66 Problem 16-9 Requirement 1 RELATED ASSET – CUMULATIVE BALANCE (NOT REQUIRED) ($ in thousands) Collections Service Revenue Service previous current Receivable Revenue year year Balance 2005 $30 2006 $750 30 740 10 2007 715 10 690 25 2008 700 25 695 5 67 Problem 16-9 (continued) ($ in thousands) Current Future Year Taxable 2006 Amount Accounting income 250 Temporary difference: 2005 services (30) 30 2006 services (10) 10 Taxable income 270 Enacted tax rate 40% 40% Tax payable currently 108 Deferred tax liability 4 ↓ Deferred tax liability: Ending balance (balance currently needed) $ 4 Less: beginning balance: ([$650 - 620] x 40%) (12) Change needed to achieve desired balance$ (8) Journal entry at the end of 2006 Income tax expense (to balance) 100 Deferred tax liability (determined above) 8 Income tax payable (determined above) 108 68 Problem 16-9 (continued) Requirement 2 ($ in thousands) Current Future Year Taxable 2007 Amount Accounting income 220 Temporary difference: 2006 services (10) 10 2007 services (25) 25 Taxable income 205 Enacted tax rate 40% 40% Tax payable currently 82 Deferred tax liability 10 ↓ Deferred tax liability: Ending balance (balance currently needed) $10 Less: beginning balance: (from 2006 calculation) (4) Change needed to achieve desired balance $ 6 Journal entry at the end of 2007 Income tax expense (to balance) 88 Deferred tax liability (determined above) 6 Income tax payable (determined above) 82 69 Problem 16-9 (concluded) Requirement 3 ($ in thousands) Current Future Year Taxable 2008 Amount Accounting income 200 Temporary difference: 2007 services (25) 25 2008 services (5) 5 Taxable income 220 Enacted tax rate 40% 40% Tax payable currently 88 Deferred tax liability 2 ↓ Deferred tax liability: Ending balance (balance currently needed) $ 2 Less: beginning balance: (from 2007 calculation) (10) Change needed to achieve desired balance $ (8) Journal entry at the end of 2008 Income tax expense (to balance) 80 Deferred tax liability (determined above) 8 Income tax payable (determined above) 88 70 Problem 16-10 Requirement 1 ($ in millions) Current Future Prior Years Year Deductible 2004 2005 2006 Amounts [total] Accounting loss (135) Non-temporary difference: Fine paid 5 Temporary differences: Loss contingency 10 (10) Taxable loss (120) Loss carryback (75) (30) 105 Loss carryforward 15 (15) 0 (25) Enacted tax rate 40% 40% 40% 40% Tax payable (refundable) (30) (12) 0 Deferred tax asset (10) ↓ Deferred tax asset: Ending balance (balance currently needed) $ 10 Less: beginning balance (0) Change needed to achieve desired balance $10 Journal entry at the end of 2006 Receivable – income tax refund ($30 + 12) 42 Deferred tax asset (determined above) 10 Income tax benefit (to balance) 52 71 Requirement 2 ($ in millions) Operating loss before income taxes $135 Less: Income tax benefit: Tax refund from loss carryback $42 Future tax benefits 10 52 Net operating loss $ 83 72 Problem 16-10 (concluded) Requirement 3 ($ in millions) Current Future Year Deductible 2007 Amounts Accounting income 60 Temporary differences: Loss contingency (10) Operating loss carryforward (15) Taxable income 35 0 Enacted tax rate 40% 40% Tax payable 14 Deferred tax asset 0 ↓ Deferred tax asset: Ending balance (balance currently needed) $ 0 Less: beginning balance (10) Change needed to achieve desired balance $(10) Journal entry at the end of 2007 Income tax expense (to balance) 24 Deferred tax asset (determined above) 10 Income tax payable (determined above) 14 73 Problem 16-11 Tempo Co. INCOME TAX EXPENSE AND NET INCOME For the Year Ended December 31, 2006 1. Income before income taxes $430,000 Income tax expense: Current (30% x [430,000 - 30,000]) $120,000 Deferred (see computation below) 9,000 129,000 Net income $301,000 Computation: Deferred income tax expense Temporary difference-depreciation 2007 $10,000 2008 15,000 2009 20,000 $45,000 Effective tax rate for years 2007 through 2009 35% Deferred tax liability, 12/31/06 $15,750 Less: 12/31/05 deferred tax asset 9,000 12/31/05 deferred tax liability (15,750) (6,750) $ 9,000 2. Tempo Co. CALCULATION OF INTEREST EXPENSE For the Year Ended December 31, 2006 Note payable - bank 1/1/06 to 9/30/06 - $75,000 x 10% x 9/12 $5,625 10/1/06 to 12/31/06 - $70,000 x 10% x 3/12 1,750 $7,375 Capital lease obligation 1/1/06/to12/31/06 7,526 Bonds payable 7/1/06 to 12/31/06 27,584 $42,485 74 Problem 16-11 (concluded) 3. Temp Co. LONG-TERM LIABILITIES SECTION OF BALANCE SHEET December 31, 2006 Long-term liabilities: Note payable-bank; 14 principal payments of $5,000 plus 10% interest due annually on September 30 $70,000 Less current portion 5,000 $ 65,000 Capital lease obligation - 15 payments of $9,000 due annually on January 1 $75,260 Less current portion 1,474 73,786 11% bonds payable due June 30, 2033, less unamortized discount of $40,191 459,809 Deferred income tax liability 15,750 Total long-term liabilities $614,345 75 CASES Analysis Case 16-1 Requirement 1 Temporary differences originate in one or more years and reverse in one or more future years. Differing depreciation methods are a common example of a temporary difference. On the other hand, permanent differences are not offset by corresponding reversals in future periods. Interest on municipal bonds is a common example of a permanent difference. Requirement 2 Intraperiod tax allocation allocates the total income tax expense for a reporting period among the financial statement items that gave rise to the income tax expense. As a result, certain items should be reported net of their respective income tax effects: • Income (or loss) from continuing operations • Discontinued operations • Extraordinary items Interperiod tax allocation recognizes the tax consequences of events in the year in which the events are recognized for financial reporting purposes. It results in matching income tax expense with the related revenues. An example is warranty expense. The expense is estimated and reported in the income statement when the warranted product is sold, but not deducted on the tax return until actually paid. The future tax benefit of that deduction is a deferred tax asset in the meantime. Requirement 3 Deferred tax liabilities are not reported individually, but instead combined with deferred tax assets into a net current amount and a net noncurrent amount. Each is reported as either an asset – if deferred tax assets exceed deferred tax liabilities, or as a liability – if deferred tax liabilities exceed deferred tax assets. Deferred tax assets and deferred tax liabilities are classified as either current or noncurrent according to how the related assets or liabilities are classified for financial reporting. For instance, a deferred tax liability arising from estimated warranty expenses would be classified as current if the warranty liability is classified as current. A deferred tax asset or liability that is not related to a specific asset or liability should be classified according to when the underlying temporary difference is expected to reverse. 76 Integrating Case 16-2 Requirement 1 Because postretirement costs aren’t tax deductible until paid to, or on behalf of, employees, accruing compensation expense produces temporary differences that create future deductible amounts. These have favorable tax consequences that are recognized as deferred tax assets. The deferred tax assets represent the future tax benefit from the reversal of the temporary difference between the financial statement carrying amount of the postretirement benefit liability and its tax basis. Requirement 2 Unlike most temporary differences, the temporary difference for postretirement benefits is related to an estimated liability – postretirement benefit liability – that already is a discounted amount. The postretirement benefit liability is the discounted present value of estimated future postretirement benefits. Perhaps the appropriate objection to SFAS 109 regarding discounting is inconsistency; some amounts are discounted, some are not. 77 Judgment Case 16-3 Requirement 1 ($ in millions, except per share amounts) Russell-James Corporation Income Statement For the year ended December 31, 2009 Revenues $300 Cost of goods sold 90 Gross profit $210 Selling and administrative expenses (60) Income from continuing operations before income taxes $150 Income taxes 60 Income from continuing operations $ 90 Discontinued operations: Loss from operations of cosmetics division, less applicable income taxes of $40 $(60) Gain from disposal of cosmetics division, less applicable income taxes of $6 9 (51) Income before extraordinary item $ 39 Extraordinary loss from earthquake, less applicable income taxes of $4 (6) Net income $ 33 Per share of common stock (100 million shares): Income from continuing operations $.90 Loss from operations of cosmetics division, net of tax (.60) Gain from disposal of cosmetics division, net of tax .09 Income before extraordinary item $.39 Extraordinary loss from earthquake, net of tax (.06) Net income $.33 78 Case 16-3 (concluded) Requirement 2 Income taxes on income from continuing operations $60 Tax savings on loss from cosmetics division (40) Tax on gain from disposal of cosmetics division 6 Tax savings on loss from earthquake (4) Income taxes (total, unallocated) $22 International Case 16-4 The report should indicate similarities and differences between the United States and the chosen country focusing on the following issues: a. Variations between accounting income and taxable income are common in the United States, whereas in some countries no differences exist – accounting income and taxable income are the same. b. In the United States, these differences, when temporary, create deferred taxes. In some countries, income taxes are not deferred. Tax expense is simply the actual tax paid. c. A deferred tax liability or deferred tax asset is recognized in the United States for the tax consequences of all amounts that will become taxable or deductible in future years as a result of transactions or events that already have occurred. Under standards of the International Accounting Standards Committee (IASC) and many countries, income taxes are deferred, but if differences are not expected to reverse for at least three years, these amounts can be excluded from tax expense. Optionally, the report might compare (a) the degree of conservatism in the approaches taken by the two countries or (b) whether cultural differences are likely contributors to the differences observed. 79 Judgment Case 16-5 Requirement 1 Increasing debt increases risk. Financial risk often is measured by the debt-to- equity ratio: total liabilities/shareholders’ equity. The higher the debt-to-equity ratio, other things being equal, the higher the risk. Analysts sometimes maintain that deferred taxes should be excluded, arguing that in many cases the deferred tax liability account remains the same (or continually grows larger). The reasoning is that no future tax payment will be required. Requirement 2 If we follow the argument above, we would reduce the numerator by the deferred tax: $5,813 – 1,610. Reducing liabilities would necessitate also increasing equity to keep everything in balance: $5,524 + 1,610. (The reasoning behind adjusting both amounts is that we are in effect reversing the effect of recording the deferred tax liability over time which was: Income tax expense (reduces income and therefore equity [retained earnings]) 1,610 Deferred tax liability (increases liabilities) 1,610 So, the revised ratio would be: ($5,813 – 1,610) ÷ ($5,524 + 1,610) = .59 This is a 44% reduction in the ratio. Requirement 3 The counterargument to this approach, though, is similar to other situations in which long-term borrowings tend to remain the same or continually grow larger. Academic research suggests that investors view deferred tax liabilities as real liabilities and they appear to discount them according to the timing and likelihood of the liability’s settlement. So, omitting deferred tax liabilities might distort the real debt-equity position. 80 Integrating Case 16-6 Requirement 1 When an investment is acquired to be held for an unspecified period of time, it is reported at the fair value of the investment securities on the reporting date. Reporting investments at their fair values means adjusting their carrying amounts for changes in fair value after their acquisition (or since the last reporting date if they were held at that time.) These changes are called “unrealized holding gains and losses” because they haven’t yet been realized through the sale of the securities. Investments in securities available for sale are reported at fair value. Holding gains and losses from retaining securities during periods of price change are not included in the determination of income for the period. Instead, they are accumulated and reported as a separate component of shareholders’ equity. That is, an unrealized holding gain would increase shareholders’ equity; an unrealized holding loss would decrease shareholders’ equity. Requirement 2 ($ in 000s) Investment in marketable equity securities (given) .............. 15,351 Unrealized holding gain on investments (given)............... 9,979 Deferred income tax liability (difference) .......................... 5,372 Temporary differences between the reported amount of an asset (Investment in marketable equity securities in this case) in the financial statements and its tax basis result in deferred taxes (Deferred income tax liability in this case). This temporary difference creates a deferred tax liability because it results in taxable amounts in some future year(s) when the investment is sold (when the temporary difference reverses). 81 Communication Case 16-7 Rayne Co. SCHEDULE OF INTEREST EXPENSE For the Year Ended December 31, 2009 1. Schedule of interest expense for the year ended December 31, 2009 Note payable $6,600 [1] Capital lease obligation 4,750 [2] Bonds payable 26,900 [3] Total interest expense $38,250 [1] 1,800 (90,000 x 8% x 3/12) + 4,800 (80,000 x 8% x 9/12) [2] 10% x 47,500 (62,500 - 15,000) [3] 538,000 x 10% x 1/2 2. Memo to Dunn from Green: To: Dunn From: Green Re: Accounting for income taxes Below is a brief overview of accounting for income taxes in accordance with SFAS 109. The objectives of accounting for income taxes are to recognize (a) the amount of taxes payable or refundable for the current year, and (b) deferred tax liabilities and assets for the estimated future tax consequences of temporary differences and carryforwards. Temporary differences are differences between the tax basis of assets or liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured based on the provisions of enacted tax law; the effects of future changes in the tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced if necessary, by a valuation allowance to reflect the net asset amount that is more likely than not to be realized. Deferred income tax expense or benefit is measured as the change during the year in an enterprise's deferred tax liabilities and assets. 82 Integrating Case 16-8 a. This is a correction of an error. To correct the error: Prepaid insurance ($35,000 ÷ 5 yrs x 3 yrs: 2006-2008) ........... 21,000 Income tax payable ($21,000 x 40%) ............................... 8,400 Retained earnings* ................................................................ 12,600 *($35,000 – [$35,000 ÷ 5 years x 2 years: 2004-05]) less $8,400 tax 2006 adjusting entry: Insurance expense ($35,000 ÷ 5 years) ...................................... 7,000 Prepaid insurance ........................................................... 7,000 The financial statements that were incorrect as a result of the error would be retrospectively restated to report the prepaid insurance acquired and reflect the correct amount of insurance expense when those statements are reported again for comparative purposes in the current annual report. A “prior period adjustment” to retained earnings would be reported, and a disclosure note should describe the nature of the error and the impact of its correction on each year’s net income, income before extraordinary items, and earnings per share. b. This is a correction of an error. To correct the error: Retained earnings (net effect) ..................................................... 15,000 Refund - income tax ($25,000 x 40%) ................................. 10,000 Inventory .................................................................................. 25,000 The financial statements that were incorrect as a result of the error would be retrospectively restated to report the correct inventory amounts, cost of goods sold, and retained earnings when those statements are reported again for comparative purposes in the current annual report. A “prior period adjustment” to retained earnings would be reported, and a disclosure note should describe the nature of the error and the impact of its correction on each year’s net income, income before extraordinary items, and earnings per share. 83 Case 16-8 (continued) c. This is a change in accounting principle and is reported retrospectively. To record the change: Inventory (given) .................................................................. 960,000 Deferred tax liability ($960,000 x 40%) ............................ 384,000 Retained earnings (net effect) ................................................ 576,000 Most changes in accounting principle are accounted for retrospectively. Prior years' financial statements are recast to reflect the use of the new accounting method. The company should increases retained earnings to the balance it would have had if the FIFO method had been used previously; that is, by the cumulative net income difference between the LIFO and FIFO methods. Simultaneously, inventory is increased to the balance it would have had if the FIFO method had always been used. A disclosure note should justify that the change is preferable and describe the effect of the change on any financial statement line items and per share amounts affected for all periods reported. For financial reporting purposes, but not for tax, the company is retrospectively increasing accounting income, but not taxable income. This creates a temporary difference between the two that will reverse over time as the unsold inventory becomes cost of goods sold. When that happens, taxable income will be higher than accounting income. When taxable income will be higher than accounting income as a temporary difference reverses, we have a “future taxable amount” and record a deferred tax liability. 84 Case 16-8 (continued) d. This is a correction of an error. To correct the error: Retained earnings (net effect) ..................................................... 9,300 Refund - income tax ($15,500 x 40%) .................................. 6,200 Compensation expense ......................................................... 15,500 The 2005 financial statements that were incorrect as a result of the error would be retrospectively restated to report the correct compensation expense, net income, and retained earnings when those statements are reported again for comparative purposes in the current annual report. A “prior period adjustment” to retained earnings would be reported, and a disclosure note should describe the nature of the error and the impact of its correction on each year’s net income, income before extraordinary items, and earnings per share. e. This is a change in estimate resulting from a change in accounting principle and is accounted for prospectively. No entry is needed to record the change 2006 adjusting entry: Depreciation expense calculated below) ................................... 57,600 Accumulated depreciation ............................................ 57,600 A change in depreciation method is considered a change in accounting estimate resulting from a change in accounting principle. Accordingly, Williams- Santana reports the change prospectively; previous financial statements are not revised. Instead, the company simply employs the straight-line method from now on. The undepreciated cost remaining at the time of the change is depreciated straight-line over the remaining useful life. Undepreciated cost, Jan. 1, 2006 (given) $460,800 Estimated residual value (0) To be depreciated over remaining 8 years $460,800 8 years Annual straight-line depreciation 2006-13 $ 57,600 85 Case 16-8 (concluded) f. This is a correction of an error. To correct the error: Equipment (cost) .................................................................. 1,000,000 Accumulated depreciation ([$1,000,000 ÷ 10] x 3 years) ..... 300,000 Deferred tax liability ([$1,000,000 - $300,000] x 40%) ....... 280,000 Retained earnings ($1,000,000 – [$100,000 x 3 years]) less $280,000 tax ........... 420,000 2006 adjusting entry: Depreciation expense ($1,000,000 ÷ 10) .............................. 100,000 Accumulated depreciation .............................................. 100,000 The financial statements that were incorrect as a result of the error would be retrospectively restated to report the correct depreciation, assets, and retained earnings when those statements are reported again for comparative purposes in the current annual report. A “prior period adjustment” to retained earnings would be reported, and a disclosure note should describe the nature of the error and the impact of its correction on each year’s net income, income before extraordinary items, and earnings per share. 86 Real World Case 16-9 Deferred tax assets and deferred tax liabilities are classified as either current or noncurrent according to how the related assets or liabilities are classified for financial reporting. A deferred tax asset or deferred tax liability is considered to be related to an asset or liability if reduction (including amortization) of that asset or liability will cause the temporary difference to reverse. Deferred tax assets and deferred tax liabilities are not reported separately. Instead, they are offset, and a net current amount and a net noncurrent amount are reported as either an asset or a liability. Because it reports a noncurrent liability, “Deferred income taxes” of $327.6 million, while the “net deferred tax liability” reported in the disclosure note is only $270.3 million, Walgreen apparently has a net current asset – i.e., current deferred tax assets in excess of current deferred tax liabilities. The apparent amount of the net current asset is $327.6 million - $270.3 million, or $57.3 million. This is reported as a current asset in the balance sheet. The company reports noncurrent deferred tax liabilities in excess of noncurrent deferred tax assets, a $327.6 million net noncurrent liability as a long-term liability in the balance sheet. The journal entry that summarizes the entries Walgreen used to record 2004 income taxes can be reconstructed from the information provided in the note: ($ in millions) Income tax expense (given) 816.1 Deferred tax asset ($484.9 – 419.4) 65.5 Deferred tax liability ($755.2 – 617.5) 137.7 Income tax payable (to balance*) 9.8 Cash (given) 734.1 * The income tax payable differs from the $734.1 million cash actually paid in 2007 because corporations make estimated tax payments throughout the year that often do not match exactly the eventual tax liability. 87 Research Case 16-10 An objective of this case is to acquaint the student with information provided by the Treasury Department and the IRS on the Internet, and in particular the ability to download forms. Another goal is to provide perspective on various topics (e.g., deductions, temporary differences, net operating loss) discussed in the chapter. Specific deductions are listed that are deductible from “total income” to arrive at “taxable income.” On the 2004 Form 1120 these are items 12 (compensation of officers) through 29 (net operating loss deduction). Each of these items is a deduction that might not also be included among expenses in the income statement. In addition, the amounts for the items might be different on the two statements. A “net operating loss deduction” would be reported if a company reported a net operating loss in a previous period that was not “carried back” to a prior period and hasn’t yet been deducted as an operating loss carryforward. The deduction reduces taxable income and therefore taxes payable. Temporary differences between taxable income and pretax income in the income statement are created when the amounts for various deductions differ from corresponding expenses in the income statement – if the differences will eventually be in the opposite direction, that is, if the differences will “reverse.” Differences in revenue items on the two reports might also create temporary differences. 88 Analysis Case 16-11 1. Deferred tax assets and deferred tax liabilities are classified as either current or noncurrent depending on how the related assets or liabilities are classified for financial reporting. The several deferred tax assets and liabilities should be combined into two summary amounts. Current deferred tax assets and liabilities should be netted together, with the net current amount reported as either a current asset, if deferred tax assets exceed deferred tax liabilities, or current liability, if deferred tax liabilities exceed deferred tax assets. A single net noncurrent amount, too, should be reported as a net noncurrent asset or a net noncurrent liability. FedEx reports deferred income taxes as both an asset and a liability because, apparently, the net current amount is a current asset and the net noncurrent amount is a liability. 2. Note 11 in the disclosure notes indicates that deferred tax assets are $1,265 million in 2004 and deferred tax liabilities are $1,957 million. The reason these amounts differ from the two amounts reported in the balance sheet relates to the answer to requirement 1. Both the $1,265 million deferred tax assets and the $1,957 million of deferred tax liabilities are separated into current and long- term classifications. The current portions of each are combined to produce a $489 million current asset and the noncurrent portions of each are combined to produce a long-term liability of $1,181 million. Note that $1,957 – 1,265 = $692 and $1,181 – 489 = $692. 3. A valuation allowance is needed if it is “more likely than not” that some portion or all of a deferred tax asset will not be realized. FedEx recorded a valuation allowance of $37 million for its deferred tax assets as reported in Note 11. 89 Real World Case 16-12 1. Kroger's Feb., 2005 (fiscal 2004) income statement reports the income tax expense for the year as $390 million. The current portion is $96 + 36 = $132 million. The deferred portion of the expense is $258 million. 2. Deferred tax assets and deferred tax liabilities are classified as either current or noncurrent according to how the related assets or liabilities are classified for financial reporting. A deferred tax asset or deferred tax liability is considered to be related to an asset or liability if reduction (including amortization) of that asset or liability will cause the temporary difference to reverse. Deferred tax assets and deferred tax liabilities are not necessarily reported separately. Instead, they are offset, and a net current amount and a net noncurrent amount are reported as either an asset or a liability. In fiscal 2004, Kroger reports current deferred tax liabilities ($286 million) in excess of current deferred tax assets ($19 million), a $267 million net current liability. This is reported as part of "other current liabilities" in the balance sheet. The company reports noncurrent deferred tax liabilities ($1,705 million) in excess of net noncurrent deferred tax assets ($766 million), a $939 million net noncurrent liability. This is reported separately as a long-term liability (in "other liabilities”) in the balance sheet. Solution Manual for Intermediate Accounting David J. Spiceland, James F. Sepe, Lawrence A. Tomassini 9780072994025, 9780072524482