Question

Wee Corporation began operations in 2011. It reported book income or loss of $(4,000), $5,000, and $5,000 during 2011-2013 respectively.

During 2011-2013, the difference between taxable income and book income resulted from the following items:

1) During 2011-2013, Wee accrued post-retirement healthcare costs (OPEB) of $2,000, $4,000, and $6,000 respectively. The OPEB costs are deductible for tax purposes when paid in 2018.

2) During 2013, Wee reported $3,000 of tax-exempt interest on municipal securities.

Tax rates for 2011-2014 were as follows.                 

Year	Rate
2011	40%
2012	30%
2013	20%
2014	30%

Wee carries losses back whenever possible.

During 2014, the current year, Wee’s income statement and tax returns were as follows:

	Book	Tax
Sales Revenue	$30,000	$30,000
Installment Sales	24,000	----------
Interest Income	3,000	----------
	57,000	30,000
Expenses
Wages	20,000	20,000
Depreciation	10,000	30,000
Bad debt	2,000	----------
	32,000	50,000
Income (Loss) Before Tax	$25,000	$(20,000)

Other information:

1. Installment sales are taxed when collected, equally in 2016-2018.

2. Interest income is earned on tax-exempt securities.

3. Bad debts are deductible for taxes when the accounts are written off, equally in 2015 and 2016.

4. Depreciation expense will reverse equally in 2015 and 2016.

5. Wee determined that 60% of net operating loss carryforward would not be realized. Wee expects to earn no taxable income in 2015 and 2016.

6. On December 31, 2014, Congress enacted new tax rates, effective January 1, 2015. The new rates will be

2015 will 20%   

2016 and beyond 40%

1. Prepare a schedule of Wee’s temporary differences and carryforwards and related deferred tax assets and liabilities at December 31, 2013.

Temporary difference and Carryforwards            Rate                 DTA                DTL

Taxable / (Deductible)

2. Prepare a schedule of Wee’s temporary differences and carryforwards and related deferred tax assets and liabilities at December 31, 2014.

Temporary difference and Carryforwards            Rate                 DTA                DTL

Taxable / (Deductible)

3. Prepare Wee’s journal entries for 2014 taxes.

Answer 1

1		wee corporation Losses:-
		2011	2012	2013	Deffered tax
	Book income	-4000	5000	5000
1	Time Difference not allowed in Income Tax	2000	4000	6000	DTA
2	Permanent Difference not taxable in Income Tax	-3000	-3000	-3000	No
	Taxable Income	-5000	6000	8000	DTA on Loss
	Tax Rates	40%	30%	20%
	Deffered tax assets	2800	1200	1200
	Total DTA as on 31 Dec 2013	5200

2.  

2		wee corporation
		2014	Deffered tax
	Book income	25,000
1	Time Difference not allowed in Income Tax		DTA
2	Permanent Difference not taxable in Income Tax	(3,000)	No
3	Time Difference of Installment sale not taxed	(24,000)	DTL
4	Time Difference of bad debts not allowed in income tax	2,000	DTA
5	Time Difference of Depreciation allowed in income tax	(20,000)	DTL
	Taxable Income	(20,000)	DTA on Loss
	Tax Rates	30%
	Deffered tax Liability	6,600
	Total DTL as on 31 Dec 2014	1400

3. Profit & Loss Dr. 6600

To Deffered tax assets 5200

To Deffered tax liability 1400

( Being Deffred tax expense booked)