Deferred Tax Liability

1. Chapter 16 Illustrated Solution: Problem 16-28 Deferred Tax Liability

2. Timpany Motors, Inc. • Income and expense recognition rules differ between financial accounting standards (GAAP) and Internal Revenue Code. This typically causes corporations to report one “net income” to stockholders and a different “net income” to the IRS.

3. Timpany Motors, Inc. • Income and expense recognition rules differ between financial accounting standards (GAAP) and Internal Revenue Code. This typically causes corporations to report one “net income” to stockholders and a different “net income” to the IRS. • Many of these differences arise from expense or revenue items that will eventually be recognized for both financial reporting and tax purposes. However, financial reporting and tax reporting will recognize these items in different reporting periods which may cause temporary timing differences in reported net income.

4. Part 1 — Income Taxes Payable Timpany Motors, Inc. Pretax financial income……………………………. $75,000

5. Part 1 — Income Taxes Payable Timpany Motors, Inc. Pretax financial income……………………………. $75,000 Nondeductible expenses………………………….. 30,000

6. Part 1 — Income Taxes Payable Timpany Motors, Inc. Pretax financial income……………………………. $75,000 Nondeductible expenses………………………….. 30,000 Nontaxable revenues………………………………. (12,500)

7. Part 1 — Income Taxes Payable Timpany Motors, Inc. Pretax financial income……………………………. $75,000 Nondeductible expenses………………………….. 30,000 Nontaxable revenues………………………………. (12,500) Gross profit on installment sales………………….. (28,000)

8. Part 1 — Income Taxes Payable Timpany Motors, Inc. Pretax financial income……………………………. $75,000 Nondeductible expenses………………………….. 30,000 Nontaxable revenues………………………………. (12,500) Gross profit on installment sales………………….. (28,000) Taxable income…………………………………….. $64,500

9. Part 1 — Journal Entry Timpany Motors, Inc. Pretax financial income……………………………. $75,000 Nondeductible expenses………………………….. 30,000 Nontaxable revenues………………………………. (12,500) Gross profit on installment sales………………….. (28,000) Taxable income…………………………………….. $64,500 Income Tax Expense—Current …………………… 25,800 Income Taxes Payable ………………………… 25,800 ($64,500 x .40)

10. Part 1 — Deferred Taxes

11. Part 1 — Deferred Taxes

12. Part 1 — Deferred Taxes

13. Part 1 — Deferred Taxes The receivable from the installment sale would be classified according to the time of its expected collection. (At December 31, 2002, $6,000 would be classified as current and $22,000 as noncurrent.) The classification of the deferred tax liability will mirror this split.

14. Part 1 — Deferred Taxes Timpany Motors, Inc. Income Tax Expense—Deferred ………………….. 9,300 Deferred Tax Liability—Current ………………… 2,160 Deferred Tax Liability—Noncurrent ……………. 7,140

15. Part 2 — Partial Income Statement Timpany Motors, Inc. Partial Income Statement For the Year Ended December 31, 2002 Income from continuing operations before income taxes…………………………………….. $75,000 Income taxes on continuing operations: Current provision………………………………. Deferred provision……………………………… Net income…………………………………………..

16. Part 2 — Partial Income Statement Timpany Motors, Inc. Partial Income Statement For the Year Ended December 31, 2002 Income from continuing operations before income taxes…………………………………….. $75,000 Income taxes on continuing operations: Current provision………………………………. $25,800 Deferred provision……………………………… 9,300 35,100 Net income………………………………………….. $39,900

17. End of Problem