Problem 1.

McGee Company deducts insurance expense of P84,000 for tax purposes in 2008, but the expense is not yet
recognized for accounting purposes. In 2009, 2010, and 2011, no insurance expense will be deducted for tax
purposes, but P28,000 of insurance expense will be reported for accounting purposes in each of these years. McGee
Company has a tax rate of 40% and income taxes payable of P72,000 at the end of 2008. There were no deferred
taxes at the beginning of 2008.
Required: a. What is the amount of the deferred tax liability at the end of 2008?
b. What is the amount of income tax expense for 2008?
c. Assuming that income tax payable for 2009 is 96,000, the income tax expense for 2009 would be what amount?
Problem 2.
Tyler Company made the following journal entry in late 2008 for rent on property it leases to Danford Corporation.
Cash 60,000
Unearned Rent 60,000
The payment represents rent for the years 2009 and 2010, the period covered by the lease. Tyler Company is a
cash basis taxpayer. Tyler has income tax payable of 92,000 at the end of 2008, and its tax rate is 35%
Required: a. What amount of income tax expense should Tyler Company report at the end of 2008?
b. Assuming the taxes payable at the end of 2009 is 120,000, what amount of income tax expense would Tyler
Company record for 2009?
Problem 3.
The following information is available for Nielsen Company after its first year of operations:
Income before taxes 250,000
Income tax expense 104,000
Deferred income tax (4,000)
Income tax expense 100,000
Net income 150,000

Nielsen estimated its annual warranty expense as a percentage of sales. The amount charged to warranty expense
on its books was 95,000. Assuming a 40% income tax rate, what amount was actually paid this year for warranty
claims?

Problem 4.
Meyers Co. had a deferred tax liability balance due to a temporary difference at the beginning of 2007 related to
600,000 of excess depreciation. In December of 2007, a new income tax act is signed into law that lowers the
corporate rate from 40% to 35%, effective January 1, 2009. If taxable amounts related to the temporary difference
are scheduled to be reversed by 300,000 for both 2008 and 2009, Meyers should increase or decrease deferred tax
liability by what amount?

Problem 5
Bennington Corporation began operations in 2004. There have been no permanent or temporary differences to
account for since the inception of the business. The following data are available:
Year Enacted Tax Rate Taxable Income Taxes Paid
2006 45% 750,000 337,500
2007 40% 900,000 360,000
2008 35%
2009 30%

In 2008, Bennington had an operating loss of 930,000. What amount of income tax benefits should be reported on
the 2008 income statement due to this loss?

Problem 6
On January 1, 2007, Lebo Inc purchased a machine for 720,000 which will be depreciated 72,000 per year for
financial statement reporting purposes. For income tax reporting, Lebo elected to expense 80,000 and to use
straight-line depreciation which will allow a cost recovery deduction of 64,000 for 2007. Assume a preset and
future enacted income tax rate of 30%. What amount should be added to Lebo’s deferred income tax liability for
this temporary difference at December 31, 2007?
Problem 7
On January 1, 2007, Magee Corp, purchased 40% of the voting common stock of Reed Inc. and appropriately
accounts for its investments by the equity method. During 2007, Reed reported earnings of 360,000 and paid
dividends of 120,000. Magee assumes that all of Reed’s undistributed earnings will be distributed as dividends in
future periods when the enacted tax rate will be 30%. Ignore the dividend received deduction. Magee’s current
enacted income tax rate is 25%. The increase in Magee’s deferred income tax liability for this temporary difference
is

Problem 8
Foyle Corp prepared the following reconciliation of income per books with income per tax return for the year
ended December 31, 2008.

Book income before income taxes 1,200,000

Add temporary difference
Construction contract revenue which will reverse in 2009 160,000
Deduct temporary difference
Depreciation expense which will reverse in equal amounts in
each of the next four years (640,000)
Taxable Income 720,000

Foyle’s effective income tax rate is 34% for 2008. What amount should Foyle report in its 2008 income statement
as the current provision for income taxes?

Problem 9
In its 2007 income statement, Hertz Corp, reported depreciation of 1,110,000 and interest revenue on municipal
obligations of 210,000. Hertz reported depreciation of 1,650,000 on its 2007 income tax return. The difference in
depreciation is the only temporary difference, and it will reverse equally over the next three years. Hertz’s enacted
income tax rates are 35% for 2007, 30% for 2008, and 25% for 2009 and 2010. What amount should be included in
the deferred income tax liability in Hertz’s December 31, 2007 balance sheet?

Problem 10
Karr Inc uses the accrual method of accounting for financial reporting purposes and appropriately uses the
installment method of accounting for income tax purposes. Installment income of 900,000 will be collected in the
following years when the enacted tax rates are:
Collection of Income Enacted Tax Rates
2007 90,000 35%
2008 180,000 30%
2009 270,000 30%
2010 360,000 25%

The installment income is Karr’s only temporary difference. What amount should be included in the deferred
income tax liability in Karr’s December 31, 2007 balance sheet?

Problem 11
Nevitt Co., organized on January 2, 2007, had a pretax accounting income of 880,000 and taxable income of
1,600,000 for the year ended December 31, 2007. The only temporary difference is accrued product warranty costs
which are expected to be paid as follows:

2008 240,000
2009 120,000
2010 120,000
2011 240,000
The enacted income tax rates are 35% for 2007, 30% for 2008 through 2010, and 25% for 2011. If Nevitt expects
taxable income in future years, the deferred tax asset in Nevitt’s December 31, 2009 balance sheet should be