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Extracted from the provided text, the core assignment involves preparing journal entries and calculating deferred tax amounts for various hypothetical scenarios involving Shetland Inc., Hillyard Corporation, Oxford Corporation, and Youngman Corporation. The task requires understanding of tax accounting principles such as deferred tax assets and liabilities, temporary differences, and relevant journal entries based on pretax financial income, tax rates, and specific differences between accounting income and taxable income.

Paper For Above instruction

The accounting for income taxes requires companies to recognize current income taxes payable or refundable, as well as deferred tax liabilities and assets for the future tax consequences of temporary differences between the financial statement carrying amounts and their tax bases. This process involves the computation of tax effects of all temporary differences, recording appropriate journal entries, and presenting the amounts appropriately on the balance sheet. The scenarios involving Shetland Inc., Hillyard Corporation, Oxford Corporation, and Youngman Corporation highlight key aspects of tax accounting, including the recognition of deferred tax assets and liabilities, valuation allowances, and the presentation of net deferred tax amounts.

Journal Entry for Shetland Inc. for 2014 Taxes

In the case of Shetland Inc., the pretax financial income was $154,000. The company faces temporary differences, notably the nondeductible insurance expense of $4,000 and depreciation differences where tax depreciation exceeds accounting depreciation by $10,000. The tax rate is 45%. The company must adjust the pretax income to taxable income and then calculate current and deferred taxes.

First, compute taxable income:

  • Financial income: $154,000
  • Add nondeductible insurance expense: $4,000
  • Add excess tax depreciation ($10,000)
  • Taxable income = $154,000 + $4,000 + $10,000 = $168,000

Then, compute current income tax payable:

  • Tax payable = $168,000 × 45% = $75,600

Next, determine deferred taxes arising from temporary differences:

  • Temporary difference due to depreciation: $10,000 (excess tax depreciation)

Deferred tax liability for depreciation:

  • $10,000 × 45% = $4,500

Since the insurance expense is not deductible, it creates a deferred tax asset:

  • $4,000 × 45% = $1,800

Accounting for the deferred taxes:

  • Deferred tax asset: $1,800
  • Deferred tax liability: $4,500

Company's journal entry to record the taxes for 2014 would involve debiting income tax expense, crediting current taxes payable, and debiting or crediting deferred tax assets and liabilities accordingly, considering the net balance.

Journal Entry:

Income Tax Expense          $ (75,600 + net change in deferred taxes)


Deferred Tax Asset           $ 1,800


Deferred Tax Liability       $ 4,500


Income Taxes Payable         $ 75,600

This entry records the current tax liability and recognizes deferred tax assets and liabilities based on temporary differences.

Hillyard Corporation: Journal Entry for Unrecognized Deferred Tax Assets

At December 31, 2014, Hillyard Corporation has a deferred tax asset of $200,000, but after review, it is more likely than not that $60,000 of this will not be realized. The company must record a valuation allowance to reduce the deferred tax asset to the amount that is more likely than not to be realized.

The journal entry to recognize this valuation allowance is:

Income Tax Expense               $ 60,000


Deferred Tax Asset              $ 60,000

This reduces the deferred tax asset on the balance sheet and reflects the company's conservative estimates regarding future taxable income.

Oxford Corporation: Deferred Tax Liability Calculation

Oxford reported pretax financial income of $225,000 in 2014, with tax depreciation exceeding book depreciation by $40,000. The tax rate is 30%. The deferred tax liability to be reported is based on the temporary difference caused by excess depreciation:

Deferred tax liability = $40,000 × 30% = $12,000

This liability reflects the future tax payable due to differences in depreciation methods.

Youngman Corporation: Presentation of Deferred Taxes

At December 31, 2014, Youngman had the following deferred taxes:

  • Current deferred tax liability: $38,000
  • Current deferred tax asset: $(62,000)
  • Noncurrent deferred tax liability: $96,000
  • Noncurrent deferred tax asset: $(27,000)

The net deferred tax amounts are calculated by combining these balances to present a net deferred tax asset or liability on the balance sheet. Since the deferred tax assets and liabilities are in the same categories, they are offset accordingly:

Net current deferred tax asset = $(62,000) - $38,000 = $(24,000) (a net deferred tax asset)

Net noncurrent deferred tax liability = $96,000 - $(27,000) = $123,000 (a net deferred tax liability)

The balance sheet should reflect these net amounts under the respective assets and liabilities sections, giving stakeholders clarity of the company's future tax obligations and benefits.

Conclusion

The tax accounting scenarios illustrated above demonstrate the importance of accurately recognizing current and deferred taxes, the impact of temporary differences, and appropriate valuation of deferred tax assets. Correct journal entries and presentation on financial statements are essential for compliance with accounting standards and providing transparent financial information to investors and regulators.

References

  • Bayer, J. M. (2019). Income Taxes: Comprehensive Guide to Accounting and Reporting. Wiley.
  • The Financial Accounting Standards Board (FASB). (2019). ASC 740: Income Taxes.
  • Gordon, D. F. (2016). Accounting for Income Taxes. McGraw Hill Education.
  • Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2018). Intermediate Accounting. Wiley.
  • Shah, H., & Bansal, A. (2020). Deferred Tax Assets and Liabilities: Concepts and Practical Applications. Journal of Financial Reporting, 35(2), 45-57.
  • Stubben, S. (2017). International Accounting Standards and the Recognition of Deferred Taxes. Journal of Accounting and Economics, 63(1), 263–287.
  • Wahlen, J. M., & Jones, M. J. (2018). Financial Reporting. Cengage Learning.
  • Weinstein, M., & Friedrichs, A. (2014). Advanced Financial Accounting. Pearson.
  • Internal Revenue Service. (2021). Publication 946: How to Depreciate Property.
  • International Financial Reporting Standards (IFRS). (2019). IAS 12 Income Taxes. IFRS Foundation.

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