ezto.mheducation.com easternct.edu Chapter 16 HW On January 1, 2013, Ameen Compa

Question

ezto.mheducation.com easternct.edu Chapter 16 HW On January 1, 2013, Ameen Company purchased a building for $43 million. Ameen uses straight-line depreciation for financial statement reporting and MACRS for income tax reporting. At December 31, 2015, the book value of the building was $37 million and its tax basis was $27 million. At December 31, 2016, the book value of the building was $35 million and its tax basis was $20 million. There were no other temporary differences and no permanent differences. Pretax accounting income for 2016 was $50 million. Required: 1. Prepare the appropriate jounal entry to record Ameen's 2016 income taxes. Assume an income tax rate of 40%or no entry is required for a transaction event, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) View transaction list Record 2016 income taxes. Credit Note : journal entry has been entered Record entry Clear entry View general journal

Explanation / Answer

Question A)

1) Calculation of Deferred tax amount for the year 2016 (Amt in million $)

Journal Entry (Amt in million $)

2) Net Income = Pretax Accounting Income - Tax Expense

= $50 million - $20 million = $30 million   

Question B)

The warrant liability on December 31, 2016 is $2,000,000. So the closing balance for the deferred tax asset will be $800,000 ($2,000,000*40%). Before the adjustment the balance for deferred tax asset is $844,000. Therefore the tax asset is reduced, hence a credit of $44,000 is required ($844,000 - $800,000).

Journal Entry (Amounts in $)

Particulars Current Year 2016 Future Taxable Amount Pretax Accounting Income 50 Temporary Difference: Depreciation [(37-27) - (35-20)] (5) 15 (35-20) Taxable Income (tax return) 45 Enacted Tax rate 40% 40% Tax payable currently 18 (45*40%) Deferred Tax Liability 6 (15*40%) Deferred Tax Liability : Ending Balance (balance currently needed) 6 Less: beginning Balance [(37-27)*40%] (4) Change Needed to achieve desired balance 2

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