Question

You are required to make a copy of the tax return that Celia Brown, the previous controller, prepared, and then begin comparing the tax return to the draft of the company's financial statements.

You prepare the following schedule for this year:

Panache, Inc. Book/Tax Differences 2014
Description	Financial Statement Amount	Tax Return Amount
Depreciation	$48,000	$40,000
Officers’ life insurance premiums	$15,000	0
Interest revenue on municipal bonds	$25,000	0
Product warranty costs	$27,000	$20,000
Gross profit on installment sales	$91,000	$80,000

In the tax file, you find the following schedule prepared by Ms. Brown:

Panache, Inc. Deferred Tax Assets & Liabilities December 31, 2015
	Item Amount	Deferred Account Balance
Deferred Tax Asset
Warranties	$49,500	$14,850
Deferred Tax Liabilities
Depreciation	$41,800	$12,540
Installment Sales	$15,700	$4,710

The company's current tax rate is 30%, and no changes in future tax rates have been enacted.

Tasks:

• Enter the information about book or tax differences in an Excel spreadsheet and identify which differences are permanent and which are temporary.
• Assuming Panache's operating income as reported on the draft of the income statement is $120,000, compute the taxable income and prepare the income tax entry needed in the same Excel spreadsheet. Also, assume the company expects to continue to be profitable and have the taxable income indefinitely.
• Write a memo to the company president, Mr. Cartwright, explaining the income tax items that will appear on the company's balance sheet for December 31, 2015.

Answer 1

Description	Financial Statement Amount	Tax Return Amount
Depreciation	$48,000	$40,000 (Timing Difference)
Officers’ life insurance premiums	$15,000	0 (Permanent Differnce as this would not be allowed as expense in Income Tax Calculation)
Interest revenue on municipal bonds	$25,000	0 (Timing Difference this will lead in creating a Deferred Tax Liability as this income is accrued but not received in the year for which taxes are calculated)
Product warranty costs	$27,000	$20,000 (Timing Difference Deferred Tax Asset)
Gross profit on installment sales	$91,000	$80,000 ( Timing difference deferred rax liability)

In the tax file, you find the following schedule prepared by Ms. Brown:

The above mentioned DTL and DTA will Set off against each other. Note all the difference is to be multiplied by 30%

Assuming that the income is $120000 the the tax entry will be as below

Provision for income Tax a/c Dr. 36000$
To, Income Tax a/c 36000$

Mr Catwright,

These are the items that will appear in the balance sheet which are related to taxes

1. Provision for Income Tax
2. Deferred Tax Asset
3. Deferred Tax Liability