FLOWER CORP INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2010, SHOWS PRETAX
ID: 2388150 • Letter: F
Question
FLOWER CORP INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2010, SHOWS PRETAX INCOME O $300,000. THE FOLLOWING ITEMS ARE TREATED DIFFERENTLY ON THE TAX RETURN AND IN THE ACCOUNTING RECORDS:TAX ACCOUNTING
RETURN RECORDS
WARRANTY EXPENSE $170,000 $185,500
DEPRECIATION EXPENSE $150,000 $100,000
PREMIUMS ON OFFICERS' LIFE INSURANCE -- $60,000
ASSUME THAT FLOWER CORP'S TAX RATE FOR 2010 IS 40%. WHAT IS THE CURRENT PORTION OF FLOWER CORP'S INCOME TAX EXPENSE FOR 2010?
A) $106,200
B) $120,200
C) $130,200
D) $144,200
Explanation / Answer
Ok, one thing to know before we get started is that there are differences between the way the IRS does accounting and the way US GAAP does accounting. Knowing the real reasons behind this are complicated... let's face it the tax code doesn't always make sense. For many higher level accounting/tax courses memorizing these differences is probably required (I know it is for the CPA too...). In this problem we're given the differences between GAAP and tax. All we have to do is make some adjustments to pretax accounting income to get it to taxable income, multiply that by our tax rate, and we have our current tax liability starting with 300,000 pretax income... 1. warranty expense add 15,500 This is because 15,500 of the warranty expense is not tax deductible so we have to add it back to GAAP income. 2. Depreciation expense subtract 50,000 Tax allows faster depreciation than GAAP, so in the early years of an asset the depreciation for tax is just about always higher. This requires us to subtract a higher depreciation expense than in the financial accounting books. 3. Premiums on Life insurance add 60,000 This is another GAAP expense that isn't allowed to be deducted for tax, we have to add it back Our math will look like this... 300,000 +15,500 -50,000 +60,000 total taxable income is 325,500 multiply by the tax rate of 40% current tax expense 130,200 *I could also go into deferred taxes here if you need help in that area. I'm not sure how advanced your accounting class is... for additional help feel free to email me nszucs@kent.edu Goodluck!
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