Question

.		$000s	2xx1	2xx2	2xx3
		Effective tax rate	40%
		GAAP Income before tax	625	650	565
A	$110 Warranty expense recorded & provision provided in 2xx1 but paid out 40% in 2xx2 & 60% in 2xx3
B	Earned $35 interest on tax free municipal bonds in 2xx1, included in GAAP income
C	Provision for bad debts made in 2xx1 of $55, realized $40 of that in 2xx2 and $15 in 2xx3; no other provisions
D	Received $160 for subscription n 2xx0; 25% recorded as GAAP income in 2xx0, balance is GAAP income in 2xx1
E	only depreciation expense for GAAP resulted from straight line $400 asset PURCHASED with $80 residual 4yr.life
		This asset was a MACRS 3yr. Asset for tax purpose; for GAAP into service for 4 of 12 months of 2xx1
		consider no other depreciable assets
F	NOL carryforward is $260 at YE 2xx0
G	Beginning Deferred tax asset/liability for 2xx1= $260 * 40% = $104 resulting from NOL
		PLUS add from D. Subscription above
1	Compute YE 2xx0 Deferred tax asset or liability [NET]							2	GAAP tax expense
		Compute for 2xx1, 2xx2, 2xx3 each year or YE as appropriate
3	IRS tax payable		4	The YE deferred tax asset or liability [NET]

Answer 1

	2xx1	2xx2	2xx3
GAAP income	625	650	565
warranty expenses	110	-44	-66
Bad debts provision and reversal	55	-40	-15
GAAP depreciation	80	80	80
Tax depreciation	-133.333	-177.8	-59.24
Loss Adjustment	-260
Subscription income	-120
Tax Profit	356.6667	468.2	504.76
IRS Tax	142.6667	187.28	201.904
GAAP Tax	236	260	226
Deferred Tax Asset for the Period	93.33333	72.72	24.096
Beginning Balance	56	149.3333	222.0533
Closing Balance	149.3333	222.0533	246.1493

Explanation

	2xx1	2xx2	2xx3
GAAP income	625	650	565
warranty expenses	110	-44	-66
Bad debts provision and reversal	55	-40	-15
GAAP depreciation	80	80	80
Tax depreciation	=400*-0.33333333333	=-400*0.4445	=400*-0.1481
Loss Adjustment	-260
Subscription income	=-0.75*160
Tax Profit	=SUM(C21:C27)	=SUM(D21:D27)	=SUM(E21:E27)
IRS Tax	=C28*0.4	=D28*0.4	=E28*0.4
GAAP Tax	=(C21-35)*0.4	=D21*0.4	226
Deferred Tax Asset for the Period	=C30-C29	=D30-D29	=E30-E29
Beginning Balance	56	=C33	=D33
Closing Balance	=SUM(C31:C32)	=SUM(D31:D32)	=SUM(E31:E32)

Beginning Balancce for year 2xx0 = $40(interest on tax free municipal bonds)+ $16((160*25%)-$104) = $56

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