Financial Reporting and Analysis
ChapterÊ12ÊSolutions
Income Tax Reporting
Exercises

Exercises 1. Determining current taxes payable
(AICPA adapted)

The amount of current income tax liability that would be reported on Ross Co.’s December 31, 1998, balance sheet is determined as follows:

Net income before depreciation expense and income taxes $100,000
Depreciation expense (for tax purposes) (20,000)
Taxable income 80,000
Tax rate 30%
Current income tax liability $24,000

2. Determining deferred tax liability
(AICPA adapted)

To determine the deferred income tax liability reported on the December 31, 1999, balance sheet requires a calculation of the cumulative temporary (timing) differences that give rise to future taxable amounts as of that date. Gross margin temporary differences are as follows:

(Book purposes) (Tax purposes) Temporary Differences Year Accrual Method Installment Method (Future Taxable Amount) 1998 $800,000 $300,000 $500,000 1999 1,300,000 700,000 600,000 Total temporary differences as of 12/31/99 $1,100,000 Tax rate in effect when differences will reverse 25% Deferred tax liability on 12/31/99 $275,000

3. Determining deferred tax liability (AICPA adapted)

Tow’s deferred tax liability for December 31, 1998, is computed as follows:

| |Reversal of | | |
| |Excess Tax Deduction | | |
|Year | |Enacted Tax Rate |Deferred Tax Liability |
|1999