Question

1. The following differences enter into the reconciliation of financial income and taxable income of Abbott Company for the year ended December 31, 2020, its first year of operations. The enacted income tax rate is 20% for all years. Pretax accounting income $800,000 Excess tax depreciation (480,000) Litigation accrual 70,000 Unearned rent revenue deferred on the books but appropriately recognized in taxable income 60,000 Interest income from New York municipal bonds (20,000) Taxable income $430,000

1. Excess tax depreciation will reverse equally over a four-year period, 2021-2024.

2. It is estimated that the litigation liability will be paid in 2024.

3. Rent revenue will be recognized during the last year of the lease, 2024.

4. Interest revenue from the New York bonds is expected to be $20,000 each year until their maturity at the end of 2024.

(a)   Prepare a schedule of future taxable and (deductible) amounts.

(b)   Prepare a schedule of the deferred tax (asset) and liability at the end of 2020.

Answer 1

(a) Prepare a schedule of future taxable and (deductible) amounts.

.

Depreciation: Excess tax depreciation will reverse equally over a four-year period, 2021-2024. = 480000 / 4 = 120000

Litigation : It is estimated that the litigation liability will be paid in 2024. =

Unearned rent : Rent revenue will be recognized during the last year of the lease, 2024. =

Interest revenue from the New York bonds is expected to be $20,000 each year until their maturity at the end of 2024.

Future taxable (deductible) amounts:	2021	2022	2023	2024	Total
Depreciation	120000	120000	120000	120000	480000
Litigation				( 70000 )	( 70000 )
Unearned rent				(60000)	(60000)

.

(b) Prepare a schedule of the deferred tax (asset) and liability at the end of 2020.

.

.	Future Taxable (Deductible)	.	Deferred Tax	Deferred Tax
Temporary Differences	Amounts	Tax Rate	(Asset)	Liability
Depreciation	$480000	20%		$96000
Litigation	( 70000 )	20%	$14000
Unearned rent	(60000)	20%	12000
Total	.		$(26000)	$96000

Deferred Tax assets = $26000

Deferred Tax liabilities = $96000