[jeff]

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Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[smsingla]

Can someone please explain when reconciling taxable income from book income for deferred taxes, how and why should you add or subtract Royalty income and warranty expenses. thanks in advance

REG 81
BEC 74,65,78
FAR 79
AUD 85 DONE!!!

[smsingla]

Can someone please explain when reconciling taxable income from book income for deferred taxes, how and why should you add or subtract Royalty income and warranty expenses. thanks in advance

REG 81
BEC 74,65,78
FAR 79
AUD 85 DONE!!!

[Amay]

Going from book income to taxable income is basically going from accrual to cash basis. To go from accrual to cash basis you need to understand how deferred income and accrued expenses work.

Book income already recorded the expenses related to warranty expense (they are estimated and accrued for before they are actually paid), however on tax basis it is only recorded when actually paid, so you would need to add this expense back to book income to get to tax income.

Not entirely sure how to explain the royalty income portion, maybe someone else can chime in. Do you have an example?

BEC: 73, 81
AUD: 85
FAR: 71, 77
REG: 74, 75...finally DONE! 😀

*This is my 2nd attempt at the CPA exam. For all of you who have failed this exam many times, given up on it, or taken a break like me, remember that it is still possible to finish what you started...failure is the opportunity to begin again more intelligently 🙂

[Amay]

Going from book income to taxable income is basically going from accrual to cash basis. To go from accrual to cash basis you need to understand how deferred income and accrued expenses work.

Book income already recorded the expenses related to warranty expense (they are estimated and accrued for before they are actually paid), however on tax basis it is only recorded when actually paid, so you would need to add this expense back to book income to get to tax income.

Not entirely sure how to explain the royalty income portion, maybe someone else can chime in. Do you have an example?

BEC: 73, 81
AUD: 85
FAR: 71, 77
REG: 74, 75...finally DONE! 😀

*This is my 2nd attempt at the CPA exam. For all of you who have failed this exam many times, given up on it, or taken a break like me, remember that it is still possible to finish what you started...failure is the opportunity to begin again more intelligently 🙂

[smsingla]

Thanks Amay. I have this question where book income is $360,000 and royalty income reported for tax purpose in excess of royalty income on the books is 12,000. and they have added this royalty income to book income to get taxable income. I don't understand that part

REG 81
BEC 74,65,78
FAR 79
AUD 85 DONE!!!

[smsingla]

Thanks Amay. I have this question where book income is $360,000 and royalty income reported for tax purpose in excess of royalty income on the books is 12,000. and they have added this royalty income to book income to get taxable income. I don't understand that part

REG 81
BEC 74,65,78
FAR 79
AUD 85 DONE!!!

[smsingla]

Another question. Please help

On January 1, 2010, Harry Corporation sold equipment costing $2,000,000 with accumulated depreciation of $500,000 to Anna Corporation, its wholly owned subsidiary, for $1,800,000. Harry was depreciating the equipment on the straight-line method over twenty years with no salvage value, which Anna continued. In consolidation at December 31, 2010, the cost and accumulated depreciation, respectively, should be

a. $1,500,000 and $100,000

b. $1,800,000 and $100,000

c. $2,000,000 and $100,000

d. $2,000,000 and $600,000

D. The cost and accumulated depreciation is equal to $2,000,000 and $600,000, respectively. On the consolidated financial statements the asset would have Harry’s cost and accumulated depreciation.

I thought answer should be C.How did they come up with A/D of 600,000. Shouldn't it be 2,000,000/20years

REG 81
BEC 74,65,78
FAR 79
AUD 85 DONE!!!

[smsingla]

Another question. Please help

On January 1, 2010, Harry Corporation sold equipment costing $2,000,000 with accumulated depreciation of $500,000 to Anna Corporation, its wholly owned subsidiary, for $1,800,000. Harry was depreciating the equipment on the straight-line method over twenty years with no salvage value, which Anna continued. In consolidation at December 31, 2010, the cost and accumulated depreciation, respectively, should be

a. $1,500,000 and $100,000

b. $1,800,000 and $100,000

c. $2,000,000 and $100,000

d. $2,000,000 and $600,000

D. The cost and accumulated depreciation is equal to $2,000,000 and $600,000, respectively. On the consolidated financial statements the asset would have Harry’s cost and accumulated depreciation.

I thought answer should be C.How did they come up with A/D of 600,000. Shouldn't it be 2,000,000/20years

REG 81
BEC 74,65,78
FAR 79
AUD 85 DONE!!!

[Mel]

Accumulated depreciation is a contra asset account so it is on the balance sheet. At the beginning of the year the depreciation was 500K so at the end of the year the depreciation should have increased by 100K to 600K.

[Mel]

Accumulated depreciation is a contra asset account so it is on the balance sheet. At the beginning of the year the depreciation was 500K so at the end of the year the depreciation should have increased by 100K to 600K.

[Wanna_B_TXCPA2014]

Need some help understanding how I got the correct answer with a WTB question. Can someone tell me how my answer, (400-40-15+25)*.4, to the below problem could be correct?

Question:

Huskie Corporation income statement for the year ended Dec 31 Yr 3, shows pretax income of $400,000. The following items for year 3 are treated differently on the tax return and the books:

Per Tax Return PerBooks

Royalty Income 20,000 40,000

Depreciation Expense 125,000 100,000

Payment of a penalty – 15,000

Assume that Huskie’s enacted tax rate for year 3 is 40%, and 30% for all future years. Of Huskie’s total income tax expense, how much should be reported as current portion of income taxes in Huskie’s year 3 income statement?

This answer is correct. When temporary differences exist, income tax expense must be allocated between the amount currently payable (current portion) and the future tax effects of temporary differences (deferred portion). The current portion is computed based on taxable income. The pretax financial (book) income must be adjusted as follows as to arrive at taxable income:

Pretax book income $400,000

Excess of royalty income per books over tax return amount (20,000)

Payment of a penalty per books 15,000

Excess of depreciation per tax return over amount per books (25,000)

Taxable income $370,000

Taxes currently payable are $148,000 ($370,000 × 40%).

Note that the $15,000 of penalty expense (a permanent difference) must be added to book income because it will never be deductible on the tax return.

[Wanna_B_TXCPA2014]

Need some help understanding how I got the correct answer with a WTB question. Can someone tell me how my answer, (400-40-15+25)*.4, to the below problem could be correct?

Question:

Huskie Corporation income statement for the year ended Dec 31 Yr 3, shows pretax income of $400,000. The following items for year 3 are treated differently on the tax return and the books:

Per Tax Return PerBooks

Royalty Income 20,000 40,000

Depreciation Expense 125,000 100,000

Payment of a penalty – 15,000

Assume that Huskie’s enacted tax rate for year 3 is 40%, and 30% for all future years. Of Huskie’s total income tax expense, how much should be reported as current portion of income taxes in Huskie’s year 3 income statement?

This answer is correct. When temporary differences exist, income tax expense must be allocated between the amount currently payable (current portion) and the future tax effects of temporary differences (deferred portion). The current portion is computed based on taxable income. The pretax financial (book) income must be adjusted as follows as to arrive at taxable income:

Pretax book income $400,000

Excess of royalty income per books over tax return amount (20,000)

Payment of a penalty per books 15,000

Excess of depreciation per tax return over amount per books (25,000)

Taxable income $370,000

Taxes currently payable are $148,000 ($370,000 × 40%).

Note that the $15,000 of penalty expense (a permanent difference) must be added to book income because it will never be deductible on the tax return.

[Mel]

As for Royalty income: It's income you receive from people selling/using assets that you created or own, i.e. patents, intellectual property, music, etc. You record Royalty Income when earned, which is normally a % of sales of the person you sold to. Just because you earned the royalty revenue/income does not mean that you received the money. And for tax purposes you need to receive that cash to consider it income.

For example: You have 600K on your books as Royalty Income but you only received 300K in cash from those royalties. Your book royalty income is 600K and your tax royalty income is 300K. So you would subtract 300K from book income to help it get to Tax income. And i think that this example would result in a deferred tax liability.

[Mel]

As for Royalty income: It's income you receive from people selling/using assets that you created or own, i.e. patents, intellectual property, music, etc. You record Royalty Income when earned, which is normally a % of sales of the person you sold to. Just because you earned the royalty revenue/income does not mean that you received the money. And for tax purposes you need to receive that cash to consider it income.

For example: You have 600K on your books as Royalty Income but you only received 300K in cash from those royalties. Your book royalty income is 600K and your tax royalty income is 300K. So you would subtract 300K from book income to help it get to Tax income. And i think that this example would result in a deferred tax liability.

[Amay]

@sm For your first question, they are saying that royalty income on a tax basis (i.e. cash basis) is MORE than book basis (i.e. accrual basis) by $12,000. Simply stated you recorded royalty income when earned of say 20,000 but you received royalty payments of 32,000. Thus, there is 12,000 more under tax basis than book basis.

Your book income right now only includes the 20,000 you recorded on an accrual basis, so in order to get to taxable income you need to add the additional 12,000 you recorded as tax basis and did not record on book basis. Does this make sense?

BEC: 73, 81
AUD: 85
FAR: 71, 77
REG: 74, 75...finally DONE! 😀

*This is my 2nd attempt at the CPA exam. For all of you who have failed this exam many times, given up on it, or taken a break like me, remember that it is still possible to finish what you started...failure is the opportunity to begin again more intelligently 🙂

[Author]

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