High-Castle Corporation’s worksheet for calculating taxable income for 2015 foll

Question

High-Castle Corporation’s worksheet for calculating taxable income for 2015 follows:

($ in thousands)

The enacted tax rate for 2015 is 35%, but it is scheduled to increase to 40% in 2016 and subsequent years. All temporary differences are originating differences. High-Castle had no deferred assets or deferred tax liabilities at December 31, 2014.

Required:

1.     Determine High-Castle's 2015 taxes due.

2.    What is the change in deferred tax assets (liabilities) for 2015?

3.    Determine tax expense for 2015.

4.    Provide a schedule that reconciles High-Castle’s statutory and effective tax rates (in both percentages and dollar amounts).

Pre-tax Income 1,000 Permanent differences: Goodwill Impairment 400 Interest on municipal bonds (200) Temporary differences: Depreciation (800) Warranty costs 400 Rent received in advance 600 Taxable income 1,400

Explanation / Answer

1. Tax due = 1400 * 35% = $490

2. Calculation of Deferred tax asset (liability) :-

Pre tax income = $ 1000

Add:- Goodwill impairment = $ 400

Less:- Depreciation = $ (800)

Tax after differences = $ 600

Tax expense = $600 * 35% = $210

Deferred tax asset = $490 - $210 = $280

3. Tax expense = $210

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