Question

The accounting records of Marin Inc. show the following data for 2017 (its first year of operations). 1. Life insurance expense on officers was $9,500. 2. Equipment was acquired in early January for $307,000. Straight-line depreciation over a 5-year life is used, with no salvage value. For tax purposes, Marin used a 30% rate to calculate depreciation. 3. Interest revenue on State of New York bonds totaled $3,700. 4. Product warranties were estimated to be $50,900 in 2017. Actual repair and labor costs related to the warranties in 2017 were $11,000. The remainder is estimated to be paid evenly in 2018 and 2019. 5. Gross profit on an accrual basis was $96,000. For tax purposes, $80,600 was recorded on the installment-sales method. 6. Fines incurred for pollution violations were $4,100. 7. Pretax financial income was $739,300. The tax rate is 30%. Prepare a schedule starting with pretax financial income in 2017 and ending with taxable income in 2017.

Answer 1

                          Schedule of Pretax Financial Income and Taxable Income for 2017

                                                                                                                                                           

            Pretax financial income.....................................................................................             $7,39,300

            Permanent differences

                    Insurance expense......................................................................................                 $9,500

                    Bond interest revenue...............................................................................                ($3,700)

                    Pollution fines.............................................................................................                 $4,100

                                                                                                                                                        749,200

            Temporary differences

                    Depreciation expense.................................................................................              ($30,700) *

                    Installment sales ($96,000 – $80,600).......................................................              ($15,400)

                    Warranty expense ($50,900 – $11,000)....................................................                $39,900

                    Taxable income .........................................................................................              $7,43,000

            * Depreciation for Equipment ($307,000/5)                                 =       $61,400

               Depreciation tax saving ($307,000 X 30%)                               =     $92,100

               Difference                                                                                           $30,700

            The income tax payable for 2017 is as follows:

                    Taxable income............................................................                 $7,43,000

                    Tax rate.........................................................................                         30%

                    Income tax payable......................................................                 $2,22,900

            The computation of the deferred income taxes for 2017 is as follows:

            Temporary differences

                    Depreciation expense                                                        $(30,700) X 30% = $(9,210) DTL

                    Installment sales ($96,000 – $80,600)                             $(15,400) X 30% =   $(4,620) DTL

                    Warranty expense ($50,000 – $10,000)                            $39,900X 30% =   $11,970 DTA