Solution manual financial accounting by valix ch4 9

71
CHAPTER 4
Problem 4-1
1.
2.
3.
4.
5.

C
A
D
D
A

6.
7.
8.
9.
10.

B
A
B
A
D

Problem 4-2
1. Income tax expense
Income tax payable (35% x 1,500,000)
525,000

525,000

2. Income tax expense
Deferred tax liability (35% x 500,000)
175,000

175,000

3. Income tax payable
Cash

200,000
200,000

Current tax expense
Deferred tax expense
175,000
Total income tax expense

525,000
700,000

Problem 4-3
1. Income tax expense
Income tax payable (35% x 4,000,000)
1,400,000
2. Deferred tax asset
Income tax benefit (35% x 1,000,000)
350,000

3. Income tax payable
Cash
Current tax expense
Income tax benefit
( 350,000)

1,400,000

350,000

500,000
500,000
1,400,000


Total income tax expense

1,050,000

72
Problem 4-4
2008
1. Income tax expense
Income tax payable (35% x 7,000,000)
2,450,000

2,450,000

2. Deferred tax asset
Income tax benefit (35% x 1,000,000)

350,000

350,000

Income statement presentation
Income before income tax
6,000,000
Income tax expense:
Current tax expense
Income tax benefit
2,100,000
Net income
3,900,000
2009
1. Income tax expense
Income tax payable (35% x 8,000,000)
2,800,000
2. Income tax expense
Deferred tax asset
350,000

(

2,450,000
350,000)

2,800,000

350,000

Income statement presentation
Income before income tax
9,000,000
Income tax expense:
Current tax expense
Decrease in deferred tax asset
3,150,000
Net income
5,850,000

2,800,000
350,000


Problem 4-5
2008
1. Income tax expense
Income tax payable (35% x 5,000,000)
1,750,000
2. Income tax expense
Deferred tax liability (35% x 500,000)
175,000

1,750,000

175,000

73

Income statement presentation

Income before income tax
5,500,000
Income tax expense:
Current tax expense
Deferred tax expense
1,925,000
Net income
2009
1. Income tax expense
Income tax payable (35% x 7,500,000)
2,625,000
2. Deferred tax liability
Income tax expense

1,750,000
175,000
3,575,000
2,625,000

175,000
175,000

Income statement presentation
Income before income tax
7,000,000
Income tax expense:
Current tax expense
Decrease in deferred tax liability
2,450,000
Net income

2,625,000
( 175,000)
4,550,000

Problem 4-6
Accounting income
Permanent differences:
Nondeductible expenses

4,000,000
200,000


Nontaxable revenue
Accounting income subject to tax
Taxable temporary differences:
Deferred income
Excess tax depreciation
(
50,000)
Deductible temporary differences:
Doubtful accounts
Estimated warranty cost
100,000
Taxable income

( 300,000)
3,900,000
( 450,000)

100,000
3,600,000

1. Income tax expense
Income tax payable (35% x 3,600,000)
1,260,000

1,260,000

2. Income tax expense
Deferred tax liability (35% x 500,000)
175,000

175,000

74
3. Deferred tax asset
Income tax benefit (35% x 200,000)
4. Income before income tax
4,000,000
Income tax expense
Current tax expense
Deferred tax expense
Income tax benefit
Net income

70,000
70,000

1,260,000
175,000
( 70,000) 1,365,000
2,635,000

Problem 4-7
2008
1. Income tax expense
Income tax payable (35% x 2,400,000)
840,000
2. Income tax expense
Deferred tax liability (35% x 600,000)
210,000
2009
1. Income tax expense

840,000

210,000

1,260,000


Income tax payable (35% x 3,600,000)
1,260,000
2. Income tax expense
Deferred tax liability (35% x 1,500,000)
525,000

525,000

2010
1. Income tax expense
Income tax payable (35% x 6,200,000)
2,170,000

2,170,000

Income before construction income
Construction income
3,000,000
Taxable income

3,200,000
6,200,000

2. Deferred tax liability
Income tax expense (35% x 2,100,000)
735,000

735,000

75
Problem 4-8
Requirement 1
The “current expense” is computed as follows:
2008
2011
Income before depreciation
4,000,000

Depreciation – SYD
100,000
Taxable income
3,900,000
Current tax expense (35%)
1,365,000

2009

2010

4,000,000

4,000,000

4,000,000

400,000

300,000

200,000

3,600,000

3,700,000

3,800,000

1,260,000

1,295,000

1,330,000

The deferred tax liability arising from the taxable temporary difference is
computed as follows:


Temporary difference
liability
2008
2009
2010
2011
Balance

150,000
50,000
( 50,000)
(150,000)
-

2008
1. Income tax expense
Income tax payable
1,260,000
2. Income tax expense
Deferred tax liability
52,500

2009
1. Income tax expense
Income tax payable
1,295,000
2. Income tax expense
Deferred tax liability
17,500
2010
1. Income tax expense
Income tax payable
1,330,000
2. Deferred tax liability
Income tax expense

Rate
35%
35%
35%

Deferred

tax

52,500
17,500
( 17,500)
( 52,500)
-

1,260,000

52,500

1,295,000

17,500

1,330,000

17,500
17,500

76
2011
1. Income tax expense
Income tax payable
1,365,000
2. Deferred tax liability
Income tax expense

1,365,000

52,500

Requirement 2 – Balance sheet on December 31, 2009
Noncurrent liabilities:

52,500

Deferred tax liability

70,000

Problem 4-9
Requirement 1
2008
2011
Accounting income
5,000,000
Doubtful accounts
Rent income
( 40,000)
Warranty cost
( 200,000)
Taxable income
4,760,000
Tax rate
35%
Current tax expense
1,666,000

2,000,000

3,000,000

(

40,000)

300,000

(

(

80,000)

20,000)

2,840,000

35%
882,000

2008
1. Income tax expense
Income tax payable
882,000
2. Deferred tax asset
Income tax benefit
182,000
2009
1. Income tax expense
Income tax payable
994,000

4,000,000

( 100,000)

( 40,000)

2,520,000

520,000
(160,000)
(120,000)
(240,000)
-

2010

100,000
120,000

Temporary difference
2008
2009
2010
2011
Balance

2009

35%
994,000
Rate
35%
35%
35%

35%

3,880,000
35%
1,358,000
Deferred tax asset
182,000
( 56,000)
( 42,000)
( 84,000)
882,000

182,000

994,000

77
2009
2. Income tax expense

56,000


Deferred tax asset
56,000
2010
1. Income tax expense
Income tax payable
2. Income tax expense
Deferred tax asset

2011
1. Income tax expense
Income tax payable
2. Income tax expense
Deferred tax asset

1,358,000
1,358,000
42,000
42,000
1,666,000
1,666,000
84,000
84,000

Requirement 2 – Balance sheet on December 31, 2008
Noncurrent assets:
Deferred tax asset
182,000
Problem 4-10
Operating loss
Interest income on note receivable
Taxable income

(1,000,000)
1,100,000
100,000

The interest income is part of taxable income because it arises from note
receivable and not from bank deposit.

1. Income tax expense (35% x 100,000)
Income tax payable
2. Deferred tax asset (35% x 300,000)
Income tax benefit

35,000
35,000
105,000
105,000

78
Income statement presentation
Loss before income tax
Income tax expense:
Current tax expense

(200,000)
( 35,000)


Income tax benefit
Net loss
(130,000)

105,000

70,000

Problem 4-11
Accounting income

Taxable temporary difference:
Tax depreciation
Deductible temporary differences:
Litigation loss
400,000
Warranty cost
Taxable income
1. Income tax expense
Income tax payable (35% x 7,600,000)
2,660,000

7,900,000
(1,000,000)

300,000
7,600,000
2,660,000

2. Income tax expense
Deferred tax liability (35% x 1,000,000)
350,000

350,000

3. Deferred asset
Income tax benefit (35% x 700,000)
245,000

245,000

Income statement presentation
Income before income tax
7,900,000
Income tax expense:
Current tax expense
Deferred tax expense
Income tax benefit
2,765,000
Net income
Balance sheet presentation
Noncurrent assets:
Deferred tax asset
245,000
Current liabilities:
Income tax payable
Noncurrent liabilities:
Deferred tax liability

2,660,000
350,000
(

245,000)

5,135,000

2,660,000
350,000

79

Problem 4-12
1. Income tax expense
Deferred tax liability (35% x 7,000,000)
2,450,000
2. Deferred tax asset
Income tax benefit (35% x 2,000,000)
700,000

2,450,000

700,000

3. Income tax expense
Income tax payable

2,800,000
2,800,000

Pretax accounting income
Future taxable amount
Future deductible amount
Taxable income

13,000,000
( 7,000,000)
2,000,000
8,000,000

Current tax expense (35% x 8,000,000)
2,800,000
4. Income before income tax
13,000,000
Income tax expense:
Current tax expense
Deferred tax expense
Income tax benefit
Net income

2,800,000
2,450,000
( 700,000)

4,550,000
8,450,000

Problem 4-13
1. Equipment
Accumulated depreciation
Revaluation surplus

4,000,000
1,500,000
2,500,000
Cost

Appreciation
Equipment
4,000,000

Accumulated depreciation
( 8,000,000 x 3/8)
(12,000,000 x 3/8)
1,500,000
BV / SV / RS
2,500,000
2. Revaluation surplus

Replacement cost

8,000,000

12,000,000

3,000,000
4,500,000
5,000,000

7,500,000
875,000


Deferred tax liability (35% x 2,500,000)
875,000
3. Income tax expense
Income tax payable

3,150,000
3,150,000

80
Pretax income before depreciation
Depreciation on cost (5,000,000 / 5)
Taxable income

10,000,000
( 1,000,000)
9,000,000

Current tax expense (35% x 9,000,000)
3,150,000
4. Deferred tax liability
Income tax expense
Equipment at replacement cost
12,000,000
Accumulated depreciation:
January 1, 2008
Depreciation on revalued amount
for 2008 (7,500,000 / 5)
6,000,000
Carrying amount – 12/31/2008
Equipment at cost
Accumulated depreciation:
January 1, 2008
Depreciation on cost for 2008
4,000,000
Tax base – 12/31/2008
Carrying amount – 12/31/2008
Tax base – 12/31/2008
Taxable temporary difference

175,000
175,000

4,500,000
1,500,000
6,000,000
8,000,000
3,000,000
1,000,000
4,000,000
6,000,000
4,000,000
2,000,000

Deferred tax liability – 12/31/2008 (35% x 2,000,000)
700,000
Deferred tax liability – 01/01/2008
875,000
Decrease in deferred tax liability
(175,000)
5. Revaluation surplus (2,500,000 – 875,000 / 5)
Retained earnings

325,000
325,000


6. Income before depreciation
Depreciation on revalued amount

Income before income tax
8,500,000
Income tax expense:
Current tax expense
Decrease in deferred tax liability
2,975,000
Net income

10,000,000
( 1,500,000)

3,150,000
( 175,000)
5,525,000

81
Problem 4-14 Answer A
Pretax accounting income
Dividend received
Financial income subject to tax
Estimated litigation loss
300,000
Revenue from installment sale
Taxable income

5,000,000
( 100,000)
4,900,000
( 600,000)
4,600,000

Current tax expense (35% x 4,600,000)
1,610,000
Problem 4-15 Answer A
Pretax accounting income
Proceeds from life insurance
Accounting income subject to tax
Excess tax depreciation
( 200,000)
Cash received – taxable in 2008
( 120,000)
Taxable income

5,000,000
( 500,000)
4,500,000

4,180,000

Total income tax expense (4,500,000 x 35%)
1,575,000
Problem 4-16 Answer C
Percentage of completion
Cost recovery method
Temporary difference
1,300,000

3,500,000
2,200,000

Deferred tax liability (35% x 1,300,000)
455,000
Problem 4-17 Answer D
The two items are nondeductible expense for tax purposes and therefore
permanent differences.
Problem 4-18 Answer C
Deferred tax asset (200,000 x 35%)

70,000

The unearned income on December 31, 2008 of P200,000 will result to a
deferred tax asset because it is a future deductible temporary difference.

82
Problem 4-19 Answer A
Current tax expense (35% x 150,000)
52,500
Problem 4-20 Answer D
The deferred tax liability of P75,000 is noncurrent.
Problem 4-21 Answer D
Current tax expense
Income tax benefit (400,000 – 300,000)
(100,000)
Total income tax expense

260,000
160,000

Problem 4-22 Answer C

Pretax accounting income
Permanent difference:
Premium on officers’ life insurance (nondeductible)
90,000
Accounting income subject to tax
1,090,000
Temporary differences:
Rent income
Depreciation
Taxable income

1,000,000

(
(

50,000)
60,000)
980,000


Income tax payable (980,000 x 35%)
343,000
The income tax payable is actually the current tax expense since there is no
income tax payment during the year.
Problem 4-23 Answer B
Income before tax and depreciation
Tax depreciation for 2008
Taxable income

2,000,000
400,000
1,600,000

Current income tax liability (1,600,000 x 35%)
560,000

83
Problem 4-24 Answer D
Taxable income
Excess tax depreciation (134,000 – 80,000)
54,000
Goodwill impairment loss
Interest on treasury bills
25,000
Pretax accounting income

380,000
( 45,000)
414,000

The pretax accounting income is the accounting income per book and not the
accounting income subject to tax.
Problem 4-25 Answer C
The impact of the difference in the equipment of P80,000 is a higher financial
income and therefore will result to a deferred tax liability. Accordingly, it is a
future taxable temporary difference.
The difference of P75,000 is a permanent difference because the officers’
insurance premium is nondeductible. Therefore, this difference has no deferred
tax consequence.

The impact of the difference of P50,000 in warranty liability is a higher taxable
income and therefore will result to a deferred tax asset. Accordingly, it is a
future deductible temporary difference.


Problem 4-26
Question 1 – Answer B
Current tax expense (1,400,000 x 35%)
490,000
Question 2 – Answer C
Deferred tax liability – noncurrent (250,000 x 35%)
87,500
Problem 4-27 Answer D
Accounting income
Future taxable amounts:
2009
2010
2011
Taxable income

6,000,000
(1,100,000)
(1,200,000)
(1,200,000)
2,500,000

Income tax payable (2,500,000 x 35%)
875,000

84

Problem 4-28 Answer A
Pretax accounting income
Permanent differences:
Interest income
Insurance premium
Accounting income subject to tax
Temporary differences:
Gross profit on installment sale
Warranty liability
Net loss carryover
Warranty liability (2,000,000 x 35%)
700,000
Net loss carryover (900,000 x 35%)
315,000
Gross deferred tax asset
1,015,000
Gross deferred tax liability (4,500,000 x 35%)
1,575,000
Problem 4-29 Answer D

2,000,000
(

500,000)
100,000
1,600,000
(4,500,000)
2,000,000
( 900,000)

Pretax accounting income
Taxable temporary differences
Deductible temporary differences
Taxable income

20,000,000
( 3,000,000)
2,000,000
19,000,000

Income tax payable (19,000,000 x 35%)
6,650,000
Problem 4-30 Answer A
Deferred tax liability – 12/31/2008 (500,000 x 35%)
175,000
The deferred tax liability is based on the cumulative future taxable temporary
difference of P500,000 on December 31, 2008.
Problem 4-31 Answer A
Deferred tax expense (1,000,000 x 35%)
350,000
Income tax benefit (200,000 x 35%)
( 70,000)
Net deferred tax expense

280,000

Current tax expense (7,000,000 x 35%)
2,450,000

85
Taxable income
Installment accounts receivable
1,000,000
Litigation liability
Accounting income subject to tax

7,000,000
( 200,000)
7,800,000

Income tax expense – total (7,800,000 x 35%)
2,730,000
Problem 4-32 Answer A
Motor vehicle – carrying amount
Motor vehicle – tax base
Future taxable amount
Deferred tax liability (35% x 400,000)
140,000

1,650,000
1,250,000
400,000


The differences in accounts receivable, warranty and deposit are future
deductible differences and therefore will give rise to deferred tax asset.
Problem 4-33 Answer D
The deferred tax asset on December 31, 2008 is supposed to be the total
deductible temporary differences of P2,000,000 times 35% or P700,000.

However, this amount cannot be fully recognized because there is strong
evidence that future taxable income may not be available.
PAS 12 provides that a deferred tax asset shall be recognized only to the extent
that it is probable that future taxable income will be available against which the
deductible temporary difference can be used.
Since there are taxable temporary differences that will reverse in 2009, this will
result to future taxable income.
Accordingly, the deferred tax asset on December 31, 2008 is recognized only to
the extent of the taxable temporary differences of P1,200,000 times 35% or
P420,000.

86
Problem 4-34
Question 1 – Answer A
Taxable income
8,000,000
Excess tax depreciation
800,000
Estimated product claim liability
( 1,200,000)
Installment sales income not included in taxable income
2,600,000
Accounting income subject to tax
10,200,000
Total income tax expense (35% x 10,200,000)
3,570,000


Question 2 – Answer B
Deferred tax asset – 12/31/2008 (35% x 1,200,000)

420,000
The accrual for product liability in excess of actual claim is a future
deductible amount and therefore will result to a deferred tax asset.
Question 3 - Answer A
Excess tax depreciation
800,000
Installment sales income
2,600,000
Total future taxable amount
3,400,000
Deferred tax liability – 12/31/2008 (35% x 3,400,000)
1,190,000
Problem 4-35 Answer C
Deferred tax asset – 12/31/2008 (2,000,000 x 35%)
700,000
Problem 4-36 Answer B
1. To record increase in deferred tax liability:
Income tax expense
Deferred tax liability (144,000 – 140,000)
4,000

4,000

87

2. To record decrease in deferred tax asset:
Income tax expense
Deferred tax asset
40,000

40,000


88
CHAPTER 5
Problem 5-1
1.
2.
3.
4.
5.

C
B
B
A
B

Problem 5-2
6.
7.
8.
9.
10.

D
B
C
B
A

1.
2.
3.
4.
5.

D
C
A
A
A


Problem 5-3
2008
Jan. 1 Equipment
Note payable
Dec. 31

Note payable
Interest expense (12% x 600,000)

600,000
600,000
300,000
72,000

Cash
2009

Dec. 31 Note payable
Interest expense (12% x 300,000)
Cash

372,000
300,000
36,000
336,000

Problem 5-4
1. Land

1,000,000

Cash
100,000
Note payable
900,000
2. Interest expense (10% x 900,000)
Accrued interest payable

90,000
90,000

3. Interest expense
Accrued interest payable (900,000 + 90,000 x 10%)
99,000
4. Note payable
Accrued interest payable
Cash

99,000

900,000
189,000
1,089,000

89
Problem 5-5


1. Machinery
Discount on note payable
Cash
200,000
Note payable
800,000

750,000
250,000

2. Note payable
Cash
200,000

200,000

3. Interest expense
Discount on note payable
100,000

Year
2008
2009
2010
2011

Note payable
800,000
600,000
400,000
200,000
2,000,000

100,000

Fraction
8/20
6/20
4/20
2/20

Amortization
100,000
75,000
50,000
25,000
250,000

Problem 5-6
1. Building (500,000 + 3,602,700)

Discount on note payable
Cash
Note payable

4,102,700
897,300
500,000
4,500,000

Face of note
Present value (1,500,000 x 2.4018)
3,602,700
Imputed interest
897,300
2. Note payable
Cash
3. Interest expense
Discount on note payable (12% x 3,602,700)
432,324

4,500,000

1,500,000
1,500,000
432,324

Problem 5-7
1. Land (1,250,000 + 2,847,200)
Discount on note payable

4,097,200
1,152,800


Cash
Note payable

1,250,000
4,000,000

90
Face value of note payable
Present value (4,000,000 x .7118)
2,847,200
Imputed interest
1,152,800
2. Interest expense
Discount on note payable (12% x 2,847,200)
341,664
3. Note payable
Cash

4,000,000

341,664

4,000,000
4,000,000

Problem 5-8

1. Total liability
Less: Book value of property:
Land
Building
5,700,000
Gain
2. Mortgage payable
Accrued interest payable
Accumulated depreciation
Land
Building
6,000,000
Gain on extinguishment of debt
300,000

6,000,000
1,500,000
4,200,000
300,000
5,000,000
1,000,000
1,800,000
1,500,000

Problem 5-9
1. Note payable
Accrued interest payable
Investment in equity securities
600,000
Gain on extinguishment of debt

600,000
2. Note payable
Accrued interest payable

1,000,000
200,000

1,000,000
200,000


Investment in equity securities
600,000
Gain on exchange
Gain on debt restructuring
100,000

500,000

Fair value
Book value
Gain on exchange

1,100,000
600,000
500,000

91
Note payable
Accrued interest payable

Total liability
Less: Fair value of securities
1,100,000
Gain on debt restructuring
100,000

1,000,000
200,000
1,200,000

Problem 5-10
Mortgage payable
Accrued interest payable
Share capital (35,000 x 100)
3,500,000
Share premium

4,000,000
300,000
800,000

Problem 5-11
Note payable
Accrued interest payable
Total liability
Restructured liability:
Principal
Interest
7,800,000
Gain on debt restructuring

1,000,000
Note payable
Accrued interest payable
Note payable – restructured
Gain on debt restructuring
1,000,000

8,000,000
800,000
8,800,000
7,000,000
800,000

8,000,000
800,000
7,800,000


Problem 5-12
PV of principal (7,000,000 x .8573)
6,001,100
PV of interest payments (700,000 x 1.7833)
1,248,310
Total present value of new liability
7,249,410
Note payable
Accrued interest
Total old liability
8,640,000
PV of new liability

Gain on extinguishment
1,390,590

8,000,000
640,000
7,249,410
of debt

92
1. Note payable - old
Accrued interest payable
Note payable – new
Premium on note payable
Gain on debt extinguishment of debt
1,390,590

8,000,000
640,000
7,000,000
249,410

2. Interest expense
Cash

700,000

3. Premium on note payable
Interest expense

120,047

700,000
120,047

Interest paid
Interest expense (7,249,410 x 8%)
579,953
Amortization of premium
4. Interest expense
Cash
Premium on note payable
Interest expense (249,410 – 120,047)
129,363
Note payable

700,000
120,047
700,000
700,000
129,363

7,000,000


Cash

7,000,000

Problem 5-13
PV of principal (5,500,000 x .6355)

3,495,250
PV of interest payments (440,000 x 3.0373)
1,336,412
PV of new liability
Face value
Discount on note payable

4,831,662
5,500,000
668,338

Note payable – old
Accrued interest (6,000,000 x 12%)
720,000
Total old liability
6,720,000
PV of new liability
Gain on extinguishment of debt
1,888,338

6,000,000

4,831,662

93
1. Note payable - old
Accrued interest payable
Discount on note payable
Note payable – new
Gain on extinguishment

1,888,338

6,000,000
720,000
668,338
5,500,000
of debt

Interest expense (8% x 5,500,000)
Cash
Interest expense
Discount on note payable

440,000
440,000
139,799
139,799

Interest paid
Interest expense (4,831,662 x 12%)
579,799
Discount amortization

440,000
139,799

Problem 5-14
1. Note payable
Land

5,000,000
2,800,000