Question

Assume Abbee Industries (AI) starts the current year, 2016, with a deferred tax asset balance of $2,000 and a deferred tax liability balance of $4,000. The current statutory tax rate, which is projected to be in effect when temporary differences reverse, is 30%. The reported pre-tax accounting income is $250,000. Analyze the following items to determine taxable income and income taxes payable, the change in deferred taxes payable (future taxable and deductible amounts), and tax expense for 2016. Assume there is no need for a valuation allowance (provision) for deferred tax assets

1. AI's book income includes an $7,000 deduction for premiums paid on executive life insurance in which the company is named the beneficiary.
2. AI collected $24,000 of rent for a warehouse it leases to a local fabricator. Of this amount, $6,000 is unearned and will be recognized as revenue (for book purposes) in 2017.
3. Bad debts written off in the current period totaled $12,000 and provision (expense) for bad debts (under the allowance method) for book purposes amounted to $9,000. AI uses the direct write-off method for tax and the "allowance method" for book purposes.
4. AI's straight-line depreciation for book purposes is $80,000 in the current year and $150,000 is deductible for tax purposes under the MACRS method.
5. AI accrued $7,000 for estimated future warranty costs in 2016 and paid $4,000 in the current period for warranty defects.
6. AI's book income included $5,000 of interest revenue from municipal bonds.

AI's effective tax rate for 2016 is:

  

30.5%

   

45.6%

   

30.2%

   

31.0%

   

37.7%

Answer 1

Income as per books	$ 2,50,000.00
Life Insurance Premium	$        7,000.00
Rent collected but unearned	$        6,000.00
Bad Debts Written off	$      -9,000.00
Provision for Bad Debts	$      12,000.00
Straight Line Depreciation	$      80,000.00
MACRS Depreciation	$ -1,50,000.00
Estimated Future Warranty Costs	$        7,000.00
Current Period Costs	$      -4,000.00
Interest Revenue from Municipal Bonds	$      -5,000.00
Taxable Income	$ 1,94,000.00

Income Tax to be paid = $194000 x 30% = $58200
Deferred Tax asset created = $1800
Deferred Tax Liability Created = $21000
Income Tax Expense = $58200+ $21000- $1800 = $77400
Effective Tax Rate = $77400 / $250000 x 100 = 31.0%