Checkers Corporation Checkers Corporation had a tax liability for 20X7 of $20,00
ID: 2408573 • Letter: C
Question
Checkers Corporation
Checkers Corporation had a tax liability for 20X7 of $20,000 based on a tax rate of 40%, but the accounting staff needs your help in determining the tax expense and deferred tax amounts for 20X7. The enacted tax rates for the future periods are 35% for 20X8 – 20Y2, and then 30% for 20Y3 – 20Y6. Checkers does not believe that temporary differences can be reasonably projected beyond those periods. The taxable income for 20X8 was $100,000. Checkers also owned a 30% interest in Chess, which reported income of $50,000 and $60,000 in 20X7 and 20X8, respectively. Checkers received dividends of $5,000 and $8,000 from Chess for 20X7 and 20X8, respectively. Checkers expects this pattern of earnings and dividends to continue over the next ten years, if not longer.
Checkers estimated warranty expense to be $7,500 in 20X7 and $10,000 in 20X8. Actual warranty cost for the two years was $6,000 and $12,000, respectively. The bad debts expense recognized on the income statement was $15,000 in 20X7 and $20,000 in 20X8. Actual bad debt write-offs per the tax return were $10,000 in 20X7 and $15,000 in 20X8.
On January 1, 20X8 Checkers also received $30,000 of rent in advance covering a two-year rental agreement, and $5,000 for interest income on municipal bonds (classified as held-to-maturity securities). The bonds mature in 20Y0.
Depreciation expense calculations for Checkers are as follows:
Year Cost Recovery Depreciation Year Cost Recovery Depreciation 20X7 $24,000 $10,000 20Y2 9,000 10,000 20X8 24,000 10,000 20Y3 8,500 10,000 20X9 17,000 10,000 20Y4 4,500 10,000 20Y0 12,000 10,000 20Y5 ---- 10,000 20Y1 9,000 10,000 20Y6 ---- 10,000 (amounts continue in next columns) Totals $ 108,000 $ 100,000
Key Terminology
Taxable Income: Income (per IRC) less deductions (per IRC) per tax return Tax Liability: Taxes owed to government per income tax return (based on Taxable Income) Net Income: Revenue minus expenses per GAAP Provision for Income Taxes or Income Tax Expense: An income statement amount determined based upon the taxable/deductible GAAP components. Includes the amount currently payable per tax return (tax liability) plus/minus any deferred amounts computed per schedules. Deferred Income Taxes: A theoretical/conceptual liability that will be paid, only if the entity continues to generate a profit
into the future continues as a going concern. Deferred taxes are not a legal obligation.
Required:
1. Determine the tax expense and the deferred tax amounts for 20X7 and 20X8. 2. Determine the tax liability amount for 20X8. 3. Prepare all necessary journal entries for the two year period (20X7 – 20X8). 4. Prepare a partial income statement for 20X7 showing earnings before tax, provision for income tax, and net income. A good example of this format would be schedule M-1 from a corporate income tax return.
Explanation / Answer
Checkers
2017
2018
Taxable Income
80000
100000
Increase in awrranty ( Expenditure)
-1500
Decrease in warranty
2000
Increase in Bad debts
-5000
-5000
Reduction in depreciation
14000
14000
Profit as per Income Statement
87500
111000
Tax Expense Rate 40% 35%
Tax Expense as per books
35000
38850
Increase in Deffered Tax Liability
2600
1050
Decrease in Deffered Tax Liability
-5600
-4900
Workings::
Reduction in warranty
1500
-2000
Tax Rate
40%
35%
Increase in Deffered Tax Liability
600
Decrease in Deffered Tax Liability
-700
Reduction in bad debts against provisioning
5000
5000
Tax Rate
40%
35%
Decrease in Deffered Tax Liability
2000
1750
Depreciation:
Tax
Book
Year
Cost Recovery
Depreciation
Difference
2017
24000
10000
14000
2018
24000
10000
14000
2019
17000
10000
7000
2020
12000
10000
2000
2021
9000
10000
-1000
2022
9000
10000
-1000
2023
8500
10000
-1500
2024
4500
10000
-5500
2025
10000
-10000
2026
10000
-10000
Deffered Tax Liability on Depreciation
-5600
(14000*.40)
-4900
(14000*.35)
3.Tax Expense Deffered A/c Dr 2600
To Deferred Tax Liability Ac cr 2600
Deferred Tax Liability A/c 5600
To Deffered Tax Liability 5600
For 2018 :
Tax Expense Deffered A/c Dr 1050
To Deferred Tax Liability Ac cr 1050
Deferred Tax Liability A/c 4900
To Deffered Tax Liability 4900
4. PArtial Income Statement :
Earnings before Tax: 87500
Provision for Tax 35000
Net Income : 52500
Checkers
2017
2018
Taxable Income
80000
100000
Increase in awrranty ( Expenditure)
-1500
Decrease in warranty
2000
Increase in Bad debts
-5000
-5000
Reduction in depreciation
14000
14000
Profit as per Income Statement
87500
111000
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