Permanent Differences, Tempora Tax Rate to Effective Tax Rate, Classification of

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Permanent Differences, Tempora Tax Rate to Effective Tax Rate, Classification of Deferred Tax Accounts, Disclosure. Simply Syrup In porated, a maple syru income and taxable income during its first full year of operations: ry Tax Differences, Change in Tax Rates, Reconciliation of Statutory p maker, reported the following events causing differences between pretax accounting purchased equipment costing $440,000 (with a useful life of four years and no P17-13. In 2013, Simply Syrup salvage value) that it will depreciate on a straight-line basis for financial reporting purposes. Simply Syrup will use an accelerated method for tax purposes and depreciate $200,000 in the first year and $80,000 in the following three years (i.e, 2014 through 2016) On December 31, 2013, Simply Syrup collected $70,000 for future delivery of 3,500 cases of its Maple Light Syrup. It is schduled to deliver 2,100 cases in 2014 and the remainder in 2015 i. ili Simply Syrup invésts in yrup invésts in US.government securities to earn tax free interest. In 2013, the company reported securiti $8,000 of interest income from this investment on its income statement. ly Syrup makes a promise to its customers: "We will give you a full refund if you are hospitalized after eating our syrup on your pancakes." will cost them 10% of their sales. Sales of syrup in 2013 amounted to $100,000 and the firm re accrued warranty expense of $10,000. The warranties expire in one year. iv. Simp Based on past experience, the company estimates that this warranty corded an v. In 2013, Simply Syrup insured the life of its president, Hill L Minimon. The premiums paid amounted to $5,000. The company is the beneficiary. Simply Syrup has a 40% taxrate and reported income before tax of $500,000 under GAAP for 2013 Required » a. Compute income tax payable in 2013 b. c. Determine income tax expense for 2013 and prepare the journal entry or entries necessary to record the Determine the deferred tax asset and liability at end of 2013 tax provision for the year. Record deferred tax assets and deferred tax liabilities separately d. Classify the net deferred tax asset or deferred tax liability on the 2013 balance sheet as-currentor-noneur- axha*rent. Justify the classifieation-used. i. statuto ral rateof-40% in both percent ge Prepare the entry necessary in 2013 base ize one-half of the deferred tax asset over the reversal peri f. d on your obtaining information that Simply Syrup will not real-

Explanation / Answer

Part a:

Reported income before tax

500000

Add: Expenses disallowed

Depreciation on equipment as per accounting records

110000

Warranty expenses not allowed

10000

The premium paid on the life of President of the company

5000

125000

625000

Less: Income not to be considered

Advance received for syrup to be delivered in 2014 and 2015

70000

Interest income on US Government securities (Tax free)

8000

78000

547000

Less: Depreciation on equipment

200000

Taxable income

347000

Income tax rate

40%

Income tax payable

138800

(347000 X 40%)

Workings:

Depreciation for financial reporting purpose

Cost of equipment

440000

Useful life

4 years

Salvage value

Nil

Depreciation as per SLM

110000

(440000/4)

Part b:

Deferred tax liability and asset at the end of 2013

Temporary tax differences items:

Depreciation as per income tax rules

200000

Depreciation as per accounting rules

110000

Deferred tax liability

36000

(200000-110000) X 40%

Deferred tax liability for the advance

Advance received

70000

Deferred tax liability for the advance

28000

(70000 x 40%)

Deferred tax liability as at the end of 2013

64000

Part c:

Taxable income

347000

Income tax expense

138800

(347000 x 40%)

Date

Accounts and explanations

Debit ($)

Credit ($)

Profit and loss account

138800

Income tax provision

138800

(Being provision for income tax made)

Part d:

Deferred tax assets is classified under non-current assets of an organization as the organization is expected to earn benefit from such asset in future and the expected benefit can be realized in future as long as the company is expected to earn taxable income in the future.

Differed tax liability is recognized and classified under non-current liability as an organization is expects to pay for such liability in the future and the liability will continue to exist in the long term future until unless completely paid or set off against deferred tax asset, if allowed.   

Part a:

Reported income before tax

500000

Add: Expenses disallowed

Depreciation on equipment as per accounting records

110000

Warranty expenses not allowed

10000

The premium paid on the life of President of the company

5000

125000

625000

Less: Income not to be considered

Advance received for syrup to be delivered in 2014 and 2015

70000

Interest income on US Government securities (Tax free)

8000

78000

547000

Less: Depreciation on equipment

200000

Taxable income

347000

Income tax rate

40%

Income tax payable

138800

(347000 X 40%)

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