Chapter 18 Solutions

EXERCISE 18-1 (10-15 minutes) Add or deduct from accounting income
(a) 2 deduct
(b) 1 add
(c) 3 add
(d) 1 add
(e) 2 deduct
(f) 2 deduct
(g) 1 add
(h 3 deduct
(i) 3 deduct
(j) 1 add
(k) 1 add
(l) 1 add

EXERCISE 18-3 (15-20 minutes)

(a)
Accounting income $105,000
Permanent differences: Non-deductible fines 11,000 116,000
Timing differences: Excess of CCA over amortization (16,000 ) Excess rent collected over rent earned 24,000
Taxable income $124,000
Current income taxes - 30% $37,200

(b) Deductible
Balance (Taxable) Future Tax Current
Sheet Temporary Tax Asset Long-
Account Differences X Rate (Liability) Term
PP & E ($16,000)* 30% ($4,800) LT
Unearned
Rent revenue 24,000 30% 7,200 C
Future income tax asset, Dec. 31, 2009 2,400
Future income tax asset before adjustment 0
Incr. in future income tax asset and future income tax benefit for 2009 $2,400

* Carrying amount and tax basis are not given in the exercise, only the net difference
(c) Current Income Tax Expense 37,200 Income Tax Payable 37,200 Future Income Tax Asset 7,200* Future Income Tax Benefit 2,400 Future Income Tax Liability 4,800*
*or a net debit to Future Income Tax Asset of $2,400

Because of a flat tax rate, these totals can be reconciled:
($24,000 – $16,000) X 30% = $7,200 + ($4,800).

EXERCISE 18-3 (Continued)

(d) Income before income taxes $105,000 Income tax expense Current $37,200 Future benefit (2,400 ) 34,800 Net income $70,200

(e) Divided by Accounting @ 30% Income
Accounting income $ 105,000 31,500 30.0%
Non-deductible fines 11,000 3,300 3.1% 34,800 33.1% Effective tax rate ($34,800/$105,000) 33.1%

(f) Current assets Future income tax asset $7,200 Non-Current liabilities Future Income Tax Liability 4,800

EXERCISE 18-9 (15-20 minutes)