Winx Company began operations at the beginning of 2018.The following information is available for this...

Winx Company began operations at the beginning of 2018.

The following information is available for this company:

• Pretax financial income for 2018 is $300,000.

• Differences between the 2018 income statement and tax return include:

- Depreciation on property, plant and equipment for financial reporting purposes was $20,000 lower than for tax purposes.

- Gross profit on construction contracts using the percentage-of-completion method equaled $82,000 in the company’s books. Gross profit on construction contracts for tax purposes was $67,000.

- Warranty expense accrued for financial reporting purposes was $39,000. Warranty deductions per the tax return amounted to $34,000.

- Revenue received in advance was recorded at $150,000 for tax purposes. Only $120,000 was earned for financial reporting purposes.

- A $7,000 fine paid for violation of pollution laws was deducted in computing pretax financial income.

- Interest revenue recognized on an investment in tax-exempt municipal bonds amounted to $11,000.

• The applicable tax rate is 20%.

• Taxable income is expected for the next few years.

Instructions:

a) For each of the differences above, calculate the dollar amount of the difference and identify if it is a temporary difference or permanent difference.

b) Compute taxable income for 2018.

c) Compute the deferred tax assets and liabilities at December 31, 2018 that relate to the temporary differences described above.

Solutions

Expert Solution

Particulars	Amount	Type
Depreciation on property, plant and equipment for financial reporting purposes was $20,000 lower than for tax purposes.	$20,000	Temporary difference
- Gross profit on construction contracts using the percentage-of-completion method equaled $82,000 in the company’s books. Gross profit on construction contracts for tax purposes was $67,000.	$15,000	Temporary difference
- Warranty expense accrued for financial reporting purposes was $39,000. Warranty deductions per the tax return amounted to $34,000.	$5,000	Permanent difference
- Revenue received in advance was recorded at $150,000 for tax purposes. Only $120,000 was earned for financial reporting purposes.	$30,000	Temporary difference
- A $7,000 fine paid for violation of pollution laws was deducted in computing pretax financial income.	$7,000	Permanent difference
- Interest revenue recognized on an investment in tax-exempt municipal bonds amounted to $11,000.	$11000	Permanent difference

Particulars	Amount
• Pretax financial income for 2018	$300,000
Add:Depreciation on property, plant and equipment for financial reporting purposes was $20,000 lower than for tax purposes.	$20000
Less- Gross profit on construction contracts using the percentage-of-completion method equaled $82,000 in the company’s books. Gross profit on construction contracts for tax purposes was $67,000.	$15000
Add- Warranty expense accrued for financial reporting purposes was $39,000. Warranty deductions per the tax return amounted to $34,000.	$5000
Add- Revenue received in advance was recorded at $150,000 for tax purposes. Only $120,000 was earned for financial reporting purposes.	$30000
Add- A $7,000 fine paid for violation of pollution laws was deducted in computing pretax financial income.	$7000
Less- Interest revenue recognized on an investment in tax-exempt municipal bonds amounted to $11,000.	$11000
Total Taxable income	336000

Particulars	Amount	Type	DTL	DTA
Depreciation on property, plant and equipment for financial reporting purposes was $20,000 lower than for tax purposes.	$20,000	Temporary difference	4000
- Gross profit on construction contracts using the percentage-of-completion method equaled $82,000 in the company’s books. Gross profit on construction contracts for tax purposes was $67,000.	$15,000	Temporary difference		3000
- Warranty expense accrued for financial reporting purposes was $39,000. Warranty deductions per the tax return amounted to $34,000.	$5,000	Permanent difference	0	0
- Revenue received in advance was recorded at $150,000 for tax purposes. Only $120,000 was earned for financial reporting purposes.	$30,000	Temporary difference	6000
- A $7,000 fine paid for violation of pollution laws was deducted in computing pretax financial income.	$7,000	Permanent difference	0	0
- Interest revenue recognized on an investment in tax-exempt municipal bonds amounted to $11,000.	$11000	Permanent difference	0	0
		Total	10000	3000
		NET DTL	7000

ekkarill92 answered 2 years ago

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