Wee Corporation began operations in 2011. It reported book income or loss of $(4
ID: 2538251 • Letter: W
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.
Year
Rate
2011
40%
2012
30%
2013
20%
2014
30%
Explanation / Answer
2.
3. Profit & Loss Dr. 6600
To Deffered tax assets 5200
To Deffered tax liability 1400
( Being Deffred tax expense booked)
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
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