At December 31, 2016, Acme Inc. had the following deferred tax balances: Deferre

Question

At December 31, 2016, Acme Inc. had the following deferred tax balances: Deferred tax liability $75,000 Deferred tax asset 50,000 Valuation allowance 20,000 These deferred tax balances relate to two items. First, Acme has recorded excess tax deductions related to its plant assets. At December 31, 2016, plant assets had a book value of $1,000,000 and a tax basis of $700,000. Second, Acme had a NOL carryforward in the amount of $200,000 at December 31, 2016. Acme determined the appropriate tax rate for recording deferred taxes at December 31, 2016 was 25%. At December 31, 2017, we have the following information related to Acme’s year-end tax accrual: Income before income tax on the income statement equals $220,000 Tax basis of plant assets equals $620,000 Book value of plant assets equals $1,100,000 The company began selling products that carry a two-year warranty. The estimated liability for warranties has a $60,000 balance at 12/31/17. Acme purchased 25% of the common stock of another entity during 2017 giving them significant influence. The acquired entity paid Acme $15,000 in dividends in 2017 and Acme recognized investment income of $80,000 related to this investment. The acquired company meets the qualifications for the dividends received deduction and Acme has the intention to hold the investment long-term. Acme purchased bonds issued by the state of Iowa as a long-term investment in 2017. Acme received $30,000 of interest on these bonds in 2017. Because of increases in company profitability this year, Acme now projects that it is more likely than not that they will realize all but 10% of the benefits associated with any deferred tax asset related NOL Carryforwards. The company has determined that 28% is the appropriate tax rate for 2017 and all foreseeable future periods. Acme has elected early application of the provisions of ASU 2016-17.

Required: Determine the following amounts:

a) Total deferred tax liability at December 31,2017

b) Total deferred tax asset at December 31, 2017

c) The presentation of deferred taxes on the December 31, 2017 balance sheet

d) The amount of income tax expense recognized in the Income Statement for year ended December 31, 2017

e) The total tax liability from the 2017 tax return

Explanation / Answer

CALCULATION OF DEFERRED TAX LIABILITY/ASSETS

Details Deferred Tax Asset Deferred Tax Liability Total Income

Deaffered Tax liability 75000

Deaffered Tax Asset 50000

Income Before Income tax 220000

Valuation of allowance 20000

value of plant 75000

Value of plant 120000

liability on warrant 60000

Dividend paid -15000

Investment Income 80000

Interest Received on long term investments 30000

245000 75000 395000

a) Total deferred tax liablity- $75000

b) Total Deffered tax asset- $ 245000

c) The presentation of deferred tax asset

"Balance of Deferred tax asset and deferred tax liability should be netted off i.e. either DTA or DTL should be disclosed in the balance sheet and both should not be disclosed simultaneously for the same period.

Enterprise should offset DTA and DTL if :

o The enterprise has a legally enforceable right to set off e.g. Amount representing DTA, DTL falls under the purview of same governing taxation laws such as income tax act, 1961 and the laws permit to make

a single net payment.

o The enterprise intends to settle the asset and liability on a net basis.

DTA, DTL should be disclosed under a separate heading in the balance sheet separately from current assets and current liabilities.

And lastly, the DTA/DTL should be reviewed as at each of the Balance Sheet Date and written up/down to reflect the amount that is reasonably /virtually certain to be realised."

d) The amount of income tax expense- $395000

e) Total tax liablity will be

28% of the total income 110600

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