AC301 Unit 8 Deferred Tax Exercise Example

Course	AC301 Intermediate Accounting II
Unit	Unit 8
Paper type	Deferred tax exercise
Length	About 600 words, 5 pages double-spaced
Format	APA 7 student paper
School	Purdue University Global
Program	BS in Accounting
Updated	October 2026

Free sample paper for AC301 Unit 8

$900,000 on the Books, $780,000 on the Return: A Unit 8 Deferred Tax Exercise for an Architecture Firm

[Student Name]

Purdue University Global

AC301: Intermediate Accounting II

Unit 8 Deferred Tax Exercise

[Instructor Name]

[Date]

Loamfield Studio Architects and every amount are composite; the standards and textbook cited are real, and the 21 percent federal corporate rate is the current rate.

What this part is doingStating the two incomes, the sort and the final expense in the lead shows the exercise's full path.

Reconciliation of Pretax Financial Income to Taxable Income

1. Pretax financial income: $900,000.

2. Less municipal bond interest, exempt from federal tax (permanent): $40,000.

3. Add fines paid to a city building department, not deductible (permanent): $10,000.

4. Less excess of tax depreciation over book depreciation on plotters, servers and design workstations (temporary): $120,000.

5. Add an accrued settlement with a client over a drainage design error, expensed on the books but deductible only when paid next year (temporary): $30,000.

6. Taxable income: $780,000.

Current tax payable at 21 percent: $163,800.

Sorting the Differences

A permanent difference never reverses; it changes taxable income this year and no other. The bond interest will never be taxed and the fines will never be deducted, so they affect only the current year's tax and create no deferred balance.

A temporary difference arises when the book and tax bases of an asset or liability differ and will reverse in later years (Financial Accounting Standards Board, 1992). The firm's equipment has a lower tax basis than book basis because of faster tax depreciation, so future tax returns will show less depreciation than the books and more taxable income. The settlement has been accrued as a liability on the books but has no tax basis yet, so it will produce a tax deduction when Loamfield pays it.

The depreciation difference means Loamfield owes tax later on income it has already reported, so it creates a liability; the settlement means Loamfield will save tax later on an expense it has already reported, so it creates an asset.

What this part is doingThe highlighted sentence explains the direction of each deferred balance, the reasoning graders look for.

Deferred Tax Balances

1. Deferred tax liability, depreciation: $120,000 times 21 percent, $25,200.

2. Deferred tax asset, settlement: $30,000 times 21 percent, $6,300.

3. Net deferred tax expense: $18,900.

The enacted rate expected to apply when the differences reverse is used, which for Loamfield is the current federal rate of 21 percent.

Income Tax Expense and the Entry

Current expense: $163,800. Deferred expense: $18,900. Total income tax expense: $182,700.

Entry: Income Tax Expense, debit $182,700; Deferred Tax Asset, debit $6,300; Deferred Tax Liability, credit $25,200; Income Taxes Payable, credit $163,800.

Is a Valuation Allowance Needed?

Loamfield must cut its deferred tax asset with an allowance if the odds favor part of the future deduction going unused. Loamfield has steady taxable income, and the reversing depreciation difference alone will create more taxable income than the settlement deduction needs, so the full $6,300 is expected to be realized and no allowance is recorded.

Rate Reconciliation

1. Tax at the statutory rate on $900,000: $189,000.

2. Municipal bond interest, $40,000 at 21 percent: minus $8,400.

3. Nondeductible fines, $10,000 at 21 percent: plus $2,100.

4. Income tax expense: $182,700.

Effective rate: $182,700 divided by $900,000, 20.3 percent.

Only the permanent differences appear in the reconciliation. The temporary ones change when tax is paid, not how much expense is reported, which is why the effective rate moves only for the bond interest and the fines.

Presentation

All deferred tax balances are classified as noncurrent (Financial Accounting Standards Board, 2015). Because both arise in the same federal jurisdiction, Loamfield nets them and reports a deferred tax liability of $18,900. The notes show the components and the rate reconciliation (Kieso et al., 2019).

What this part is doingEnding on classification and netting shows the student carried the exercise through to the balance sheet.

References

Financial Accounting Standards Board. (1992). Accounting for income taxes (Statement of Financial Accounting Standards No. 109). https://www.fasb.org

Financial Accounting Standards Board. (2015). Income taxes (Topic 740): Balance sheet classification of deferred taxes (Accounting Standards Update No. 2015-17). https://www.fasb.org

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting (17th ed.). Wiley.

Reading the AC 301 Unit 8 instructions

The eighth AC301 unit gives a year's book income and a list of items that differ for tax, and asks for the tax provision. Begin with a reconciliation from pretax financial income to taxable income, labeling each item permanent or temporary. Compute current tax payable. For each temporary difference, decide whether it will produce future taxable amounts or future deductions, and measure the deferred liability or asset at the enacted rate for the reversal years. Combine current and deferred expense and record one entry. Ask whether any deferred asset needs a valuation allowance, and say why or why not. A rate reconciliation from the statutory rate to the effective rate shows the permanent items at work. Close with presentation: noncurrent classification and netting within a jurisdiction. Cite SFAS 109, the 2015 update and the textbook in APA 7.

Inside the AC301 Unit 8 example

The sample's reconciliation lists six lines, from $900,000 of pretax income through the four adjustments to $780,000, each tagged permanent or temporary and explained in a phrase. A sorting section defines both kinds and explains the direction of each temporary difference through the tax basis of the equipment and the settlement. The highlighted sentence states why one creates a liability and the other an asset. A deferred balances section multiplies each difference by 21 percent. The entry debits income tax expense and the deferred tax asset and credits the liability and taxes payable. A short section rules out a valuation allowance because reversing depreciation alone will produce enough taxable income. The rate reconciliation runs from $189,000 to $182,700. Presentation nets the two balances into an $18,900 noncurrent liability under the 2015 update.

Where the points sit in the AC301 Unit 8 rubric

AC301 graders begin with the reconciliation of book and taxable income, since an error there carries into every later number. Each item must be labeled correctly as permanent or temporary. Deferred balances are checked for direction and rate. The journal entry must balance and include all four accounts. The valuation allowance question earns credit when the student weighs evidence rather than simply saying none is needed. A rate reconciliation that includes only permanent items shows understanding of why the effective rate differs from the statutory one. Presentation under the 2015 update, noncurrent and netted, earns the final points. Tagging every reconciling line as permanent or temporary protects the reasoning marks if an amount is off. The provision rests on SFAS 109 and the 2015 classification update, which a Purdue Global accounting paper lists in APA 7 with the textbook.

Common AC301 Unit 8 mistakes, and how to avoid them

Deferred tax problems most often fail on direction: students record a deferred asset for excess tax depreciation, or a liability for an accrued expense deductible later. Permanent differences are sometimes given deferred balances. Some papers use a future rate that has not been enacted, or the current rate when a different enacted rate applies to reversal years. The entry is split into several pieces that do not tie to total expense. Rate reconciliations include temporary differences, which do not change the effective rate. Deferred balances are still classified as partly current, a split that ended in 2015. Many papers skip the valuation allowance question entirely. If your problem includes a net operating loss carryforward or a rate change during the year, a writer can work the provision and every entry from your figures.

Get an AC301 Unit 8 example written to your instructions

For Unit 8, list each difference your problem gives along with how it reverses, then add pretax income, enacted rates, any facts about realizability and the rubric. The reconciliation, deferred block, entry and rate proof rest on those within 24-48h. A first custom sample of this kind is free. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.

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AC301 Unit 8 questions, answered

What if a future tax rate has already been enacted?

Deferred balances are measured at the rate expected to apply when the difference reverses, as long as that rate has been enacted. If the law sets 25 percent for later years, the deferred liability for depreciation reversing then uses 25 percent, even though current tax uses 21. Many AC301 problems include a scheduled rate change to test this, and the sample schedules the reversals by year when they do.

When does a deferred tax asset need a valuation allowance?

When it is more likely than not that some or all of it will not be realized, usually because the company may lack future taxable income to absorb the deduction. Evidence includes recent losses, expiring carryforwards and weak forecasts. The architecture firm here is profitable and expects to remain so, so no allowance is recorded, and one sentence states that conclusion.

How are deferred tax balances shown on the balance sheet?

As noncurrent items, netted within the same tax jurisdiction. Since a 2015 simplification, all deferred tax assets and liabilities are classified as noncurrent rather than split between current and noncurrent. In this problem the 25,200 liability and the 6,300 asset net to an 18,900 noncurrent liability. The sample shows the net figure and the gross amounts in a supporting note.

Where can I find a free AC301 Unit 8 sample paper?

This page offers a complete AC301 Unit 8 deferred tax exercise for a composite architecture firm, reconciling book and taxable income, measuring a deferred liability and asset, and reconciling the effective rate, with APA 7 references.

Why does the AC301 Unit 8 rate reconciliation leave out depreciation?

Excess tax depreciation is a temporary difference, so it changes when Loamfield pays tax, not its total expense. Only the bond interest and the fines, which never reverse, move the effective rate.