Question

Unitroj Inc., reported pretax financial accounting income in 2011, 2012, 2013 and 2014 of $100 million. In 2011, Unitroj purchased a machine for $100 million with a useful life of five years. The machine is depreciated based on the straight line method and the double declining balance method for tax purposes. No other depreciable assets were acquired. The enacted tax rate is 40% per year. Also in 2011, Unitroj recorded warranty expense of $30 million with $16 million paid in 2012 and $15 million in 2013 for merchandise returned by customers. Magazine subscriptions of $20 million were received in 2011 and the company will deliver $15 million in 2012 and $5 million in 2013.

Compensation expense of $3 million related to employee stock option plans granted to organizers was reported in the 2011 income statement. In addition, Unitroj received $1 million each year in interest income from investments in municipal bonds.

REQUIRED:

Determine the income tax expense for 2011 and 2012. Be sure to show supporting computations.

Provide the appropriate journal entries to recognize income tax in 2011 and 2012.

Provide proper financial statement disclosure of the deferred tax assets (if any) and deferred tax liabilities (if any) in Unitroj’s income statement and balance sheet.

Answer 1

	DTA	DTL	DTA	DTL
Depreciation	-	20	-	4
Warranty	16		-	-
Merchandise	15		15	-
Magzine subscription	-	20	-	5
Compensation	3	-	3	-
Total	34	40	18	9
Net		6(DTL)	9(DTA)
TAX @40%		2.4	3.6

Journal entries:

	Journal entries		(in millions)
Year-2011		Debit	Credit
	Profit & loss A/c	2.4
	DTL		2.4
	(Being DTL created)
Year-2012
	DTL A/C	2.4
	Profit & loss A/c		2.4
	(Being DTL reversal)
	DTA A/c	3.6
	Profit & Loss A/C		3.6
	(Being DTL created)

				(in millions)
	Year- 2011		Year- 2012
	DTA	DTL	DTA	DTL
Depreciation	-	20	-	4
Warranty	16		-	-
Merchandise	15		15	-
Magzine subscription	-	20	-	5
Compensation	3	-	3	-
Total	34	40	18	9
Net		6(DTL)	9(DTA)
TAX @40%		2.4	3.6

Unitroj’s income statement
Particulars	2011	2012
Profits	100	100
Other income	1	1
Total	101	101
Tax Expenditure
Current Taxes	32	38.4
Deferred Tax Asset/Liablities	2.4	-3.6
Profits after tax	66.6	66.2

		(in millions)
Unitroj’s income statement
Particulars	2011	2012
Profits	100	100
Other income	1	1
Total	101	101
Tax Expenditure
Current Taxes	32	38.4
Deferred Tax Asset/Liablities	2.4	-3.6
Profits after tax	66.6	66.2

			(in millions)
		2011	2012
	profit before tax	100	100
Plus	Depreciation	20	20
Minus	Depreciation	-40	-24
Plus	warranty Exp	30	-
Minus	warranty Exp	-14	-16
	Merchandise*	-	-
Minus	Magzine subscription	-20
Plus	Magzine subscription	-	15
Plus	Compensation	3
	Total Income	79	95
	OTHER INCOME	1	1
		80	96
	CURRENT TAX 40%	32	38.4