PROBLEM 19-2(a) Before deferred tax

PROBLEM 19-2


(a) Before deferred taxes can be computed, the amount of temporary dif-ference originating (reversing) each period and the resulting cumulative temporary difference at each year-end must be computed:
2010 2011 2012 2013
Pretax financial income €290,000 €320,000 €350,000 (€420,000
Nondeductible expense 30,000 30,000 30,000 30,000
Subtotal 320,000 350,000 380,000 (450,000
Taxable income 180,000 225,000 260,000 560,000
Temporary difference originating (reversing)
€140,000
€125,000
€120,000 (
€(110,000)

Cumulative Temporary Difference At End of Year
2010 €140,000
2011 €265,000 (€140,000 + €125,000)
2012 €385,000 (€265,000 + €120,000)
2013 €275,000 (€385,000 – €110,000)

Because the temporary difference causes pretax financial income to exceed taxable income in the period it originates, the temporary differ¬ence will cause future taxable amounts.

Taxable income for 2010 €180,000
Enacted tax rate for 2010 X 35%
Current tax expense for 2010 (Income tax payable) € 63,000

2010

Income Tax Expense 112,000
Income Tax Payable 63,000
Deferred Tax Liability 49,000


PROBLEM 19-2 (Continued)

The deferred taxes at the end of 2010 would be computed as follows:

Temporary Difference Future Taxable (Deductible) Amounts Tax Rate Deferred Tax
(Asset) Liability
Depreciation €140,000 35% €49,000

Deferred tax liability at the end of 2010 € 49,000
Deferred tax liability at the beginning of 2010 0
Deferred tax expense for 2010 (increase in
deferred tax liability) € 49,000

Deferred tax expense for 2010 € 49,000
Current tax expense for 2010 (Income tax payable) 63,000
Income tax expense for 2010 €112,000

2011

Income Tax Expense 7,000*
Deferred Tax Liability 7,000
(To record the adjustment for the
increase in the enacted tax rate)

Income Tax Expense 140,000
Income Tax Payable 90,000
Deferred Tax Liability 50,000
(To record income taxes for 2011)

*The adjustment due to the change in the tax rate is computed as
follows:

Cumulative temporary difference at the end
of 2010 €140,000
Newly enacted tax rate for future years X 40%
Adjusted balance of deferred tax liability
at the end of 2010 56,000
Current balance of deferred tax liability (49,000)
Adjustment due to increase in enacted tax rate € 7,000

PROBLEM 19-2 (Continued)

Taxable income for 2011 €225,000
Enacted tax rate 40%
Current tax expense for 2011 (Income tax payable) € 90,000

The deferred taxes at December 31, 2011, are computed as follows:

Temporary Difference Future Taxable (Deductible) Amounts Tax Rate Deferred Tax
(Asset) Liability
Depreciation €265,000 40% €106,000

Deferred tax liability at the end of 2011 €106,000
Deferred tax liability at the beginning of 2011
after adjustment (56,000)
Deferred tax expense for 2011 exclusive of
adjustment due to change in tax rate (increase
in deferred tax liability) € 50,000

Deferred tax expense for 2011 € 50,000
Current tax expense for 2011 (Income tax payable) 90,000
Income tax expense (total) for 2011, exclusive
of adjustment due to change in tax rate €140,000

2012

Income Tax Expense 152,000
Income Tax Payable 104,000
Deferred Tax Liability 48,000

Taxable income for 2012 €260,000
Enacted tax rate X 40%
Current tax expense for 2012 (Income tax payable) €104,000

The deferred taxes at December 31, 2012, are computed as follows:

Temporary Difference Future Taxable (Deductible) Amounts Tax Rate Deferred Tax
(Asset) Liability
Depreciation €385,000 40% €154,000


PROBLEM 19-2 (Continued)

Deferred tax liability at the end of 2012 €154,000
Deferred tax liability at the beginning of 2012 106,000
Deferred tax expense for 2012 (increase in
deferred tax liability) € 48,000

Deferred tax expense for 2012 € 48,000
Current tax expense for 2012 (Income tax payable) 104,000
Income tax expense for 2012 €152,000

2013

Income Tax Expense 180,000
Deferred Tax Liability 44,000
Income Tax Payable 224,000

Taxable income for 2013 €560,000
Enacted tax rate X 40%
Current tax expense for 2013 (Income tax payable) €224,000

The deferred taxes at December 31, 2013, are computed as follows:

Temporary Difference Future Taxable (Deductible) Amounts Tax Rate Deferred Tax
(Asset) Liability
Depreciation €275,000 40% €110,000

Deferred tax liability at the end of 2013 € 110,000
Deferred tax liability at the beginning of 2013 (154,000)
Deferred tax benefit for 2013 (decrease in
deferred tax liability) € (44,000)

Deferred tax benefit for 2013 € (44,000)
Current tax expense for 2013 (Income tax payable) 224,000
Income tax expense for 2013 € 180,000

(b) 2011

Income before income taxes €320,000
Income tax expense
Current €90,000
Deferred 50,000
Adjustment due to change in tax rate 7,000 147,000
Net income €173,000