[pia ach]

Can someone let me know why depreciation amount is added back while computing taxable income from book income in the below case….

Depreciation deducted for tax purposes is in excess of book depreciation causes taxable income to be less than accounting income.

Finally done!!! Experience-pending. Ethics- Pending.
Reg 78 / 73/82.
Aud 74/89.
BEC 72 /78.
FAR 74/ 73/ 82.

[pia ach]

The question is ..

Pine Corp.’s books showed pretax income of $800,000 for the year ended December 31, year 3. In the computation of federal income taxes, the following data were considered:

Gain on an involuntary conversion (Pine has elected to replace the property within the statutory period using total proceeds) $350,000

Depreciation deducted for tax purposes in excess of depreciable deducted for book purposes 50,000

Federal estimated tax payments, year 3 70,000

Enacted federal tax rate, year 3 30%

What amount should Pine report as its current federal income tax liability on its December 31, year 3 balance sheet?

Finally done!!! Experience-pending. Ethics- Pending.
Reg 78 / 73/82.
Aud 74/89.
BEC 72 /78.
FAR 74/ 73/ 82.

[M.O.D.]

For book income: 450+ 350 = 800

The 350 is earned, but not for tax purposes

Tax income: 450 -50 = 400

The 50 is additional depreciation (accelerated) for tax purposes, but not for book purposes.

400x.3 = 120 taxed owed per IRC (current tax expense)

800 x.3 = 240 taxes owed per book (income tax expense)

This creates deferred tax liabilities of

15 (for the depreciation: tax will be due later)

105 (for the conversion: tax will be due later)

15 + 105 = 120 to balance the debits and credits

since the company prepaid 70, the remaining liability would be 120-70 = 50

Additional depreciation should be deducted from book income to determine tax income.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[pia ach]

Thanks M O D…i just hope this info sticks till my exam !

Finally done!!! Experience-pending. Ethics- Pending.
Reg 78 / 73/82.
Aud 74/89.
BEC 72 /78.
FAR 74/ 73/ 82.

[mla1169]

First please know you do NOT create a deferred tax liability on a gain from involuntary conversion if the proceeds are to be used to buy replacement property within the allowed time. (Read section 1033 treatment). Second please understand this question has absolutely nothing to do with deferred taxes-the word “current” in the question is your keyword. Yes mod's numbers work out the same but that is nothing more than coincidence because the two adjusting items happen to equal exactly half of book income.The question is asking how much do you still owe for the current years tax liability.

Your taxable income is $400k. (800-350 which will not be taxed ever so long as the replacement property is purchased in time-50k add'l depreciation) your current year tax expense is $120k ($400k x 30%) of which you've only paid $70k (this is not a prepayment, estimated tax payments are applied to the current year liability and ultimately should be equal but never are) Pine has underpaid it's current taxes by $50k and that is a liability on the balance sheet.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[M.O.D.]

I beg to differ:

Any temporary differences must create deferred tax liabilities, or deferred tax assets.

Gain on involuntary conversion is specifically listed as a temporary difference in my Gleim book. Some online support:

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CB4QFjAA&url=http%3A%2F%2Fbelkcollegeofbusiness.uncc.edu%2Fhgodfrey%2FT13F-Chp-05-4-GAAP-Tax-Differences.xlsx&ei=VvX4U9bFKceoyASF3YLoAw&usg=AFQjCNFDckhc_7tN7-y3XsOpa1h-I5tfxg&sig2=f0ZJhnzwsN3NiHwL-2GtMA&bvm=bv.73612305,d.aWw&cad=rja

I agree that the problem can be answered without calculating the deferred taxes, but this question appears in the deferred tax section of FAR.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[mla1169]

The ability to answer exactly and only what the question is asking is critical to this exam. The question is simply what to report in the current liabilities section. Doesn't matter which chapter it appears in. Had the differences not been equal to taxable current income the answer would have been wrong.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[M.O.D.]

The answer is right either way.

The reason one should know deferred taxes in this case is to make the journal entry to taxes payable, to calculate the balance in that account. If you don't use a deferred tax account, your debits will not equal the credits.

Income tax expense 240 ( = Current tax expense 120 + Deferred tax expense 120 )

… Taxes payable…………..120

… Def. tax liability …………120

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[mla1169]

Yes I've already agreed that in this case the answer is right either way. I just want the OP to be able to realize if the total income for the year had been $700k instead of $800k and all other things held equal the current liability would be $20k but the deferred portion would still be $120k.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[M.O.D.]

Yes agreed,

90 (revised current tax expense) -70 (estimated payments made) = 20

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

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