In its first taxable year, Band Corporation recognized $957,500 ordinary busines
ID: 2338585 • Letter: I
Question
In its first taxable year, Band Corporation recognized $957,500 ordinary business income and a $5,500 capital loss. In its second taxable year, Band recognized $1,220,000 ordinary business income, a $12,500 Section 1231 loss, and a $2,000 capital gain.
Compute Band’s book and taxable income for its first year.
Using a 21 percent tax rate, compute Band's deferred tax asset or liability (identify which) on its balance sheet on the last day of the year.
Compute Band's book and taxable income for its second year.
Using a 21 percent tax rate, compute Band's deferred tax asset or liability (identify which) on its balance sheet on the last day of the second year.
Explanation / Answer
Computation of Band book and taxable income
First year
Particulars
Book
Taxable
Ordinary business income
957500
957500
Less: capital loss
(5500)
Not deductible as it is deductible from capital gain only
Income
952000
957500
Band’s deferred tax asset as on last day of balance sheet of first year = $5500*21%= $1155
Second year
Particulars
Book
Taxable
Ordinary business income
1220000
1220000
Add: capital gain
2000
= (2000-2000)
= 0
(The capital loss of previous year can be used to set off the capital gain in the current year)
Less: section 1231 loss
(12500)
(12500)
Income
$1209500
$1207500
Deferred tax liability on capital gain = $2000*21%= $420
Thus a deferred tax asset of (1155-420)= $735 will appear as on last day of balance sheet of second year
Particulars
Book
Taxable
Ordinary business income
957500
957500
Less: capital loss
(5500)
Not deductible as it is deductible from capital gain only
Income
952000
957500
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