Revenues and expenses, excluding depreciation, that Betsy Corporation reported f

Question

Revenues and expenses, excluding depreciation, that Betsy Corporation reported for 2014, 2015, and 2016 for both financial reporting and income tax purposes are shown at the top of Exhibit 2. Assume the company bought new equipment, with zero salvage value, costing $75,000 on January 1, 2014. Betsy used straight-line depreciation, over a three-year service life for financial reporting. However, for tax purposes, Betsy reported deprecation of $40,000 in 2014, $20,000 in 2015, and $15,000 in 2016. These figures are also shown in Exhibit 2. The income tax rate is 30 percent.

Required:

How much income tax did Ralph pay for the year ending December 31, 2015? _____________

What was the income tax expense on Ralph Enterprises income statement for the year ending December 31, 2015? _________________

What is the dollar amount of the deferred tax asset or deferred tax liability shown on Ralph Enterprises balance sheet on December 31, 2015? __________________________

Was the amount in c. above (circle one) (a) deferred tax asset or (b) deferred tax liability?

EXHIBIT 2 BESTY CORPORATION Deferred Tax Problem 2014 2015 2016 Total Revenue $400,000 $500,000 $600,000 All expenses except depreciation 300,000 350,000 400,000 Income excluding depreciation $100,000 $150,000 $200,000 Depreciation for financial reporting 25,000 25,000 25,000 75,000 Depreciation for tax purposes 40,000 20,000 15,000 75,000

Explanation / Answer

2014 2015 2016 Revenues          400,000          500,000          600,000 Less: All Expenses except Dep.       (300,000)       (350,000)       (400,000) Income excluding Depreciation          100,000          150,000          200,000 Less: Dep. For Financial Reporting          (25,000)          (25,000)          (25,000) Book Profit            75,000          125,000          175,000 Income Tax Expense - 30%            22,500            37,500            52,500 Income Excluding Depreciation          100,000          150,000          200,000 Less: Dep. For Tax Purposes          (40,000)          (20,000)          (15,000) Taxable Income            60,000          130,000          185,000 Income Tax Payable - 30%            18,000            39,000            55,500 Deffered Tax Assets (Liability)            (4,500)              1,500              3,000 Income Tax Paid - 2015            39,000 Income Tax Expenses - 2015            37,500 Deferred Tax Liabilty Shown in Balance Sheet - 2015              3,000

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