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ngbrian85
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| Posted: 03 Aug 2010 at 10:08 | IP Logged
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divyagovil1 wrote:
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First of all, what are trading stamps? These are small paper coupons given to customers by merchants. These stamps have no value individually, but when a customer accumulates a number of them, they can be exchanged with the trading stamp company for merchandise.
Thus, in this question – Dunn Trading Stamp Co. records a liability every year for estimated (contingent) cost of redemption.
IGNORE “Stamp Service Revenue” because we are concerned about the cost of the stamps sold, not the net sales value of stamps sold.
Let us now prepare a T-account:
Stamp redemption liability
Actual cost of redemptions
(for prior to 1989 stamps) $2,750,000 Balance at Dec.31,1988 $6,000,000
Estimated cost of redemption
recorded for 1989 stamps
(80% of 2,250,000) $1,800,000
Balance at Dec.31, 1999
(balancing figure) $5,050,000
$5,050,000 is to be reported as liability in BS (Cr.)
note that opening balance of estimated liability gets reduced by actual cost of stamps redeemed and for CY, we only record 80% what can be redeemed for 1989 costs.
Hope this helps....
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Hi Divyagovil,
I know your good at explaining questions, can you please walk me through question 1 & 2 of this post ? I'm struggling with the income tax topic.
Thanks!
__________________
AUD - 87 - Jan23/10
BEC - 76 - Feb20/10
REG - 80 - May26/10
FAR - 81 - Aug27/10
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divyagovil1
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| Posted: 03 Aug 2010 at 10:58 | IP Logged
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Hello ngbrian, I would try my best to explain those 2 questions in the way in understood them while studying..
cpa2010 wrote:
| 1)
Quinn Co. reported a net deferred tax asset of $9,000 in its December 31, 1993, balance sheet. For 1994, Quinn reported pretax financial statement income of $300,000. Temporary differences of $100,000 resulted in taxable income of $200,000 for 1994. At December 31, 1994, Quinn had cumulative taxabledifferences of $70,000. Quinn's effective income tax rate is 30%. In its December 31, 1994, income statement, what should Quinn report as deferred income tax expense?
a. $12,000
b. $21,000
c. $30,000
d. $60,000
ans is c
can anybody explain this
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Remember, If it's a IS item, then Deferred Income Tax expense and if it's a BS one, then DTA or DTL...
Now, as per Becker method:
12/31/93 Change 12/31/94
Temporary differences 30 (100) (70)
Tax rate x30% x30%
Deferred tax asset 9 (9) 0
Deferred tax liability 0 (21) (21)
Net deferred tax 9 (30) (21)
Or, in other words:
Compare the balances at both BS dates:-
“Quinn Co. reported DTA= $9,000 in Dec/31/93 B/S.". Thus, temp difference here is 9,000 DTA/.30 tax rate = $30,000
As mentioned "At Dec./31/94 Queen has cumulative taxable differences of $70,000.".
It means the balance at Dec.31/94 is $70,000 X tax rate 30% = $21,000 DTL.
The change from DTA to DTL is $100,000 in current year.... which is the deferred tax expense to be recorded in IS for $30,000.
__________________
Divya - CO State
Passed using Becker Review :
FAR - 04/11/09 - 94
BEC - 05/30/09 - 86
REG - 08/29/09 - 95
AUD - 11/21/09 - 92
Ethics - 2011
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divyagovil1
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| Posted: 03 Aug 2010 at 11:44 | IP Logged
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cpa2010 wrote:
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2)
Kent, Inc.'s reconciliation between financial statement and taxable income for 1993 follows:
Pretax financial income $150,000
Permanent difference (12,000)
138,000
Temporary difference-depreciation (9,000)
Taxable income $129,000
Additional information:
At
12/31/92 12/31/93
Cumulative temporary differences (future taxable amounts) $11,000 $20,000
The enacted tax rate was 34% for 1992, and 40% for 1993 and years thereafter.
In its December 31, 1993, balance sheet, what amount should Kent report as deferred income tax
liability?
a. $3,600
b. $6,800
c. $7,340
d. $8,000
ans is d
can anybody explain this cumulative concepts for i.tax
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Again, the same rule - balance at year end - either a Deferred Tax Asset or a Deferred Tax Liability in Balance Sheet.
Simple rules:
A deferred tax liability occurs when taxable income is smaller than the income reported on the income statements, that is, in future more tax would be paid as less tax paid now.
Deferred tax assets are reductions in future taxes payable, because the company has already paid the taxes on book income to be recognized in the future (like a prepaid tax).
Now, question mentions "Cumulative temporary differences (future taxable amounts) ". Read words in brackets - future taxable amounts
Thus, these amounts would be resulting in deferred tax liability (taxes to be paid in future)
Thus, as per question - Cumulative temporary differences (future taxable amounts) at Dec.31, 1993 is $20,000
enacted tax rate given for 1993 = 40%
Finally, Deferred tax liability = 20,000 * 40% = $8,000 to be recorded in balance sheet.
Hope I haven't confused more...
__________________
Divya - CO State
Passed using Becker Review :
FAR - 04/11/09 - 94
BEC - 05/30/09 - 86
REG - 08/29/09 - 95
AUD - 11/21/09 - 92
Ethics - 2011
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ngbrian85
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Joined: 20 Dec 2009
Location: Canada
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Posts: 57
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| Posted: 06 Aug 2010 at 09:30 | IP Logged
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divyagovil1 wrote:
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Hello ngbrian, I would try my best to explain those 2 questions in the way in understood them while studying..
cpa2010 wrote:
| 1)
Quinn Co. reported a net deferred tax asset of $9,000 in its December 31, 1993, balance sheet. For 1994, Quinn reported pretax financial statement income of $300,000. Temporary differences of $100,000 resulted in taxable income of $200,000 for 1994. At December 31, 1994, Quinn had cumulative taxabledifferences of $70,000. Quinn's effective income tax rate is 30%. In its December 31, 1994, income statement, what should Quinn report as deferred income tax expense?
a. $12,000
b. $21,000
c. $30,000
d. $60,000
ans is c
can anybody explain this
|
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Remember, If it's a IS item, then Deferred Income Tax expense and if it's a BS one, then DTA or DTL...
Now, as per Becker method:
12/31/93 Change 12/31/94
Temporary differences 30 (100) (70)
Tax rate x30% x30%
Deferred tax asset 9 (9) 0
Deferred tax liability 0 (21) (21)
Net deferred tax 9 (30) (21)
Or, in other words:
Compare the balances at both BS dates:-
“Quinn Co. reported DTA= $9,000 in Dec/31/93 B/S.". Thus, temp difference here is 9,000 DTA/.30 tax rate = $30,000
As mentioned "At Dec./31/94 Queen has cumulative taxable differences of $70,000.".
It means the balance at Dec.31/94 is $70,000 X tax rate 30% = $21,000 DTL.
The change from DTA to DTL is $100,000 in current year.... which is the deferred tax expense to be recorded in IS for $30,000.
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Hi Divyagovil, call me an idiot for not understanding this completely, but how do you know that the cumulative taxable difference of $70K is a DTL? Is there a way you can tell ?
Thanks!
__________________
AUD - 87 - Jan23/10
BEC - 76 - Feb20/10
REG - 80 - May26/10
FAR - 81 - Aug27/10
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divyagovil1
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Joined: 30 Jan 2009
Location: India
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| Posted: 06 Aug 2010 at 13:24 | IP Logged
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ngbrian85 wrote:
divyagovil1 wrote:
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Hello ngbrian, I would try my best to explain those 2 questions in the way in understood them while studying..
cpa2010 wrote:
| 1)
Quinn Co. reported a net deferred tax asset of $9,000 in its December 31, 1993, balance sheet. For 1994, Quinn reported pretax financial statement income of $300,000. Temporary differences of $100,000 resulted in taxable income of $200,000 for 1994. At December 31, 1994, Quinn had cumulative taxabledifferences of $70,000. Quinn's effective income tax rate is 30%. In its December 31, 1994, income statement, what should Quinn report as deferred income tax expense?
a. $12,000
b. $21,000
c. $30,000
d. $60,000
ans is c
can anybody explain this
|
|
|
Remember, If it's a IS item, then Deferred Income Tax expense and if it's a BS one, then DTA or DTL...
Now, as per Becker method:
12/31/93 Change 12/31/94
Temporary differences 30 (100) (70)
Tax rate x30% x30%
Deferred tax asset 9 (9) 0
Deferred tax liability 0 (21) (21)
Net deferred tax 9 (30) (21)
Or, in other words:
Compare the balances at both BS dates:-
“Quinn Co. reported DTA= $9,000 in Dec/31/93 B/S.". Thus, temp difference here is 9,000 DTA/.30 tax rate = $30,000
As mentioned "At Dec./31/94 Queen has cumulative taxable differences of $70,000.".
It means the balance at Dec.31/94 is $70,000 X tax rate 30% = $21,000 DTL.
The change from DTA to DTL is $100,000 in current year.... which is the deferred tax expense to be recorded in IS for $30,000.
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Hi Divyagovil, call me an idiot for not understanding this completely, but how do you know that the cumulative taxable difference of $70K is a DTL? Is there a way you can tell ?
Thanks!
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ok, let me try to explain this way in form of step by step question-answers:
Ques1: What is DTA/DTL at beginning of year - Jan1, 94?
Ans1: Given, DTA $9,000
Ques2: Based on beginning DTA, what is beginning cumulative tax difference?
Ans2: DTA= Cumulative tax difference x 30% effective tax rate (tax rate given)
---> 9,000 = Cumulative tax difference x .30
Thus, beginning cumulative tax differences = 9,000/.30 = $30,000
Note: Deferred tax assets are reductions in future taxes payable, because the company has already paid the taxes on book income to be recognized in the future (like a prepaid tax).
In other words, $9,000 DTA or $30,000 tax difference is you recorded higher taxable income (more than book income) in period ending Dec.31, 1993
Ques3: What's the book income for CY 1994?
Ans 3: $3,00,000
Ques 4: What is the temporary difference (tax differences reversing out in future years) for CY 1994?
Ans 4: $100,000
Ques5: So, is this $100,000 temporary difference causing DTA or DTL? In other words, is it causing higher taxable income or lesser taxable income?
Ans5 : It's causing DTL as it is resulting in lesser taxable income (Given, Temporary differences of $100,000 resulted in taxable income of $200,000 for 1994). That is, less tax would be paid in CY but more taxes would be paid in future years.
Ques6: So, what's the cumulative tax differences at end of year- Dec.31, 1994?
Ans6: Beginning balance 30,000 (--->DTA)
less. temporary difference for CY (100,000) (--->DTL)
Ending balance (70,000) (--->Net DTL)
Ques7: So, what's net DTL reported on BS at Dec.31, 1994?
Ans7: 70,000 x 30% = (21,000) Net DTL
Ques8: What's deferred tax reported in IS?
Ans8: temporary differences for CY 100,000 x tax rate 30% = 30,000
Let me know if you are still not clear...
__________________
Divya - CO State
Passed using Becker Review :
FAR - 04/11/09 - 94
BEC - 05/30/09 - 86
REG - 08/29/09 - 95
AUD - 11/21/09 - 92
Ethics - 2011
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Topic: Accounting for Income tax
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