1. Illustrated Solution: Problem 16-28
Chapter 16
Illustrated Solution: Problem 16-28
Deferred
Tax Liability

2. Timpany Motors, Inc.
Income and expense recognition rules differ between financial accounting standards (GAAP) and Internal Revenue Code. This typically causes corporations to report one “net income” to stockholders and a different “net income” to the IRS.

3. Timpany Motors, Inc.
Income and expense recognition rules differ between financial accounting standards (GAAP) and Internal Revenue Code. This typically causes corporations to report one “net income” to stockholders and a different “net income” to the IRS.
Many of these differences arise from expense or revenue items that will eventually be recognized for both financial reporting and tax purposes. However, financial reporting and tax reporting will recognize these items in different reporting periods which may cause temporary timing differences in reported net income.

4. Part 1 — Income Taxes Payable
Timpany Motors, Inc.
Pretax financial income……………………………. $75,000

5. Part 1 — Income Taxes Payable
Timpany Motors, Inc.
Pretax financial income……………………………. $75,000
Nondeductible expenses………………………… ,000

6. Part 1 — Income Taxes Payable
Timpany Motors, Inc.
Pretax financial income……………………………. $75,000
Nondeductible expenses………………………… ,000
Nontaxable revenues………………………………. (12,500)

7. Part 1 — Income Taxes Payable
Timpany Motors, Inc.
Pretax financial income……………………………. $75,000
Nondeductible expenses………………………… ,000
Nontaxable revenues………………………………. (12,500)
Gross profit on installment sales………………….. (28,000)

8. Part 1 — Income Taxes Payable
Timpany Motors, Inc.
Pretax financial income……………………………. $75,000
Nondeductible expenses………………………… ,000
Nontaxable revenues………………………………. (12,500)
Gross profit on installment sales………………….. (28,000)
Taxable income…………………………………….. $64,500

9. Part 1 — Journal Entry Timpany Motors, Inc.
Pretax financial income……………………………. $75,000
Nondeductible expenses………………………… ,000
Nontaxable revenues………………………………. (12,500)
Gross profit on installment sales………………….. (28,000)
Taxable income…………………………………….. $64,500
Income Tax Expense—Current …………………… 25,800
Income Taxes Payable ………………………… 25,800
($64,500 x .40)

10. Part 1 — Deferred Taxes
Year
Enacted Rate
2003
36%
2004
34%
2005
30%

11. Part 1 — Deferred Taxes Enacted Rate Taxable Amount Year 2003 36%
$ 6,000
2004
34%
13,500
2005
30%
8,500
$28,000

12. Part 1 — Deferred Taxes Enacted Rate Taxable Amount
Year
Enacted Rate
Taxable Amount
Liability Valuation
2003
36%
$ 6,000
$2,160
2004
34%
13,500
4,590
2005
30%
8,500
2,550
$28,000
$9,300

13. Part 1 — Deferred Taxes Enacted Rate Taxable Amount
Year
Enacted Rate
Taxable Amount
Liability Valuation
2003
36%
$ 6,000
$2,160
2004
34%
13,500
4,590
2005
30%
8,500
2,550
$28,000
$9,300
The receivable from the installment sale would be classified according to the time of its expected collection. (At December 31, 2002, $6,000 would be classified as current and $22,000 as noncurrent.) The classification of the deferred tax liability will mirror this split.

14. Part 1 — Deferred Taxes Timpany Motors, Inc.
Income Tax Expense—Deferred ………………….. 9,300
Deferred Tax Liability—Current ………………… 2,160
Deferred Tax Liability—Noncurrent ……………. 7,140

15. Part 2 — Partial Income Statement
Timpany Motors, Inc.
Partial Income Statement
For the Year Ended December 31, 2002
Income from continuing operations before
income taxes…………………………………….. $75,000
Income taxes on continuing operations:
Current provision……………………………….
Deferred provision………………………………
Net income…………………………………………..

16. Part 2 — Partial Income Statement
Timpany Motors, Inc.
Partial Income Statement
For the Year Ended December 31, 2002
Income from continuing operations before
income taxes…………………………………….. $75,000
Income taxes on continuing operations:
Current provision………………………………. $25,800
Deferred provision……………………………… 9, ,100
Net income………………………………………….. $39,900

17. End of Problem