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Packard Company began operations on 1/1/04. For its second year of operations, 2005, it has the...

Packard Company began operations on 1/1/04. For its second year of operations, 2005, it has the following activity:

Pretax financial income $250,000
Municipal interest 5,000
Accrual of warranty costs in excess of amounts paid - expected to reverse next year 10,000
Percentage depletion in excess of cost depletion 37,500

In addition to the foregoing, Packard received $25,000 of rents in 2005 of which $15,000 remained unearned as of December 31, 2005. It is anticipated that the remaining amount will be earned in 2006.

The enacted tax rate for 2004 is 40%, and 30% for 2005. For 2006 and all future years, it is 35%. Management has also determined that it is probable that 20 percent of all deferred tax assets will not be realized in the foreseeable future. As of December 31, 2004, there was a temporary difference in depreciation that resulted in future taxable amounts of $23,000. This temporary difference will reverse in 2005. (Note: As of 12/31/2004, the 40% enacted tax rate was the only tax rate that was enacted. The 30% rate and 35% rates were not enacted until after 12/31/2004).

Based on the foregoing, what is the net income of Packard for the year ended December 31, 2005?

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Expert Solution

Packard Company started its operation on 01/01/2004.

Accurual of warranty cost will be taxed next year since it is expected to reverse next year.

percentage depletion in excess of cost depletion 20% will be taxed as management has decided that it will not be realized in the near future.

Therefore, 37500 * 20% = 7500

Rent which is unearned in the current financial year will not be calculated. Therefore, Rent will be

=$25000 - 15000

=$10000

Taxable amount of depreciation in the current year $ 23000 which was not taxed last year. Since 20% of deffered tax assests will not be realized in the forseable future it will be calculated this year.

Therefore,

Net income of packard company

Financial income 250000

Municipal Intrest 5000

Rent 10000

Percentage depletion 7500

Diffrence in depreciation   23000

Total    295500

Total tax = 295500 *40 % = $118200

Net income = $295500 - $118200

= $ 177300

ekkarill92 answered 1 year ago
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