Assume Abbee Industries (AI) starts the current year, 2016, with a deferred tax

Question

Assume Abbee Industries (AI) starts the current year, 2016, with a deferred tax asset balance of $2,000 and a deferred tax liability balance of $4,000. The current statutory tax rate, which is projected to be in effect when temporary differences reverse, is 30%. The reported pre-tax accounting income is $250,000. Analyze the following items to determine taxable income and income taxes payable, the changein deferred taxes payable (future taxable and deductible amounts), and tax expense for 2016. Assume there is no need for a valuation allowance (provision) for deferred tax assets

AI's book income includes an $7,000 deduction for premiums paid on executive life insurance in which the company is named the beneficiary.

AI collected $24,000 of rent for a warehouse it leases to a local fabricator. Of this amount, $6,000 is unearned and will be recognized as revenue (for book purposes) in 2017.

Bad debts written off in the current period totaled $12,000 and provision (expense) for bad debts (under the allowance method) for book purposes amounted to $9,000. AI uses the direct write-off method for tax and the "allowance method" for book purposes.

AI's straight-line depreciation for book purposes is $80,000 in the current year and $150,000 is deductible for tax purposes under the MACRS method.

AI accrued $7,000 for estimated future warranty costs in 2016 and paid $4,000 in the current period for warranty defects.

AI's book income included $5,000 of interest revenue from municipal bonds.

AI's effective tax rate for 2016 is:

30.2%

37.7%

45.6%

31.0%

30.5%

Explanation / Answer

Computation of taxable income:

Pre tax earnings - 250000

Add/(less):

1. Provision for bad debts - 9000

2. Book depreciation - 80000

3. Tax depreciation - (150000)

4. Accrued warranty - 3000

5. Exempt interest income - (5000)

6. Deduction on premium 7000

Total taxable income = 194,000; Current Tax @ 30.2% is 58,588

Deferred tax asset opening balance 2000

Add: Def tax on provision for bad debts (9000*30.2%) = 2718

Add: Def tax on differential accrued warranty (3000*30.2%) = 906

Total Deferred tax asset closing balance 5624

Opening deferred tax liability:(4000)

Add: DTL on depreciation difference between books and tax (70,000*30.2%): (21140)

Closing Deferred tax liability: (25140)

Effective tax reco:

PTE - 250000

CT+DT (58888+17516) =76104

ETR= 76104/250000 = 30.44%

PS: 17516 is derived by (opening deferred tax asset less closing deferred tax asset)+(opening deferred tax liability less closing deferred tax liability)

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