Da Bears has pretax accounting income (PAI) of $66,000 in 2016 after including t

Question

Da Bears has pretax accounting income (PAI) of $66,000 in 2016 after including the effects of the appropriate items from the following information:

1. MACRS (tax) depreciation $20,000

2. Officer’s life insurance premium expense 15,000

3. Interest revenue on municipal bonds 25,000

4. Depreciation taken for financial reporting purposes 38,000

5. Actual product warranty costs deducted for tax purposes 20,000

6. Excess of accrual-basis financial accounting sales over cash-basis

sales recognized for tax purposes 11,000

7. Estimated product warranty expense for financial reporting

Purposes 27,000

At the beginning of 2016, Da Bears had a deferred tax liability (DTL) balance of $17,250 which related to a $41,800 taxable temporary difference related to depreciation and another $15,700 taxable temporary difference related to accrual-basis sales differences. Da Bears had a deferred tax asset (DTA) balance of $14,850 related to a $49,500 deductible temporary difference resulting from a warranty liability (obligation under warranty) balance at the beginning of the year. The tax rate for 2016 is 30%, but during 2016, Congress changed the enacted tax rate to 34% for all future tax years beginning in 2017.

Required:

1) Compute Da Bears’ taxable income for 2016. What are income taxes payable for 2016?

2) Prepare Da Bears’ journal entry to record income tax expense for 2016 (assume no valuation allowance existed as of the beginning of the year and is unnecessary at the end of the year).

3) What is Da Bears’ effective tax rate?

Explanation / Answer

Computation of Taxable Income for 2016

Journal Entry for Income tax is as follows :-

Provision for tax Dr 28500

P/l A/c Cr 28500

PARTICULARS    AMOUNT Profit as per Profit & Loss account                66,000 Add: Depreciation under Companies Act                38,000 Less: Depreciation under Income Tax Act               (20,000) Add: Personal Premium paid through Company's account                15,000 Add: Warranty Cost under Companies Act                27,000 Less: Warranty Cost under Income Tax Act               (20,000) Excess sale recognised under Accounting Income               (11,000) Taxable Income                95,000 Income Tax @ 30%                28,500

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