Cougar has pretax accounting income (PAI) of $66,000 in 2016after including the effects of the appropriate items from thefollowing information:
MACRS (tax) depreciation $20,000
Officerâs life insurance premium expense $15,000
Interest revenue on municipal bonds $25,000
Depreciation taken for financial reporting purposes $38,000
Actual product warranty costs deducted for tax purposes$20,000
Excess of accrual-basis financial accounting sales overcash-basis
sales recognized for tax purposes $11,000
Estimated product warranty expense for financial reporting
Purposes $27,000
At the beginning of 2016, Cougar had a deferred tax liability(DTL) balance of $17,250 which reflected a $41,800 taxabletemporary difference related to depreciation and another $15,700taxable temporary difference related to accrual-basis salesdifferences. Cougar had a deferred tax asset (DTA) balance of$14,850 related to a $49,500 deductible temporary differenceresulting 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% forall future tax years beginning in 2017.
Required:
1) Compute Cougarâs taxable income for 2016. What are incometaxes payable for 2016?
2) Prepare Cougarâs journal entry to record income tax expensefor 2016 (assume no
valuation allowance existed as of the beginning of the year andis unnecessary at the end
of the year).
3) What is Cougarâs effective tax rate?
Cougar has pretax accounting income (PAI) of $66,000 in 2016after including the effects of the appropriate items from thefollowing information:
MACRS (tax) depreciation $20,000
Officerâs life insurance premium expense $15,000
Interest revenue on municipal bonds $25,000
Depreciation taken for financial reporting purposes $38,000
Actual product warranty costs deducted for tax purposes$20,000
Excess of accrual-basis financial accounting sales overcash-basis
sales recognized for tax purposes $11,000
Estimated product warranty expense for financial reporting
Purposes $27,000
At the beginning of 2016, Cougar had a deferred tax liability(DTL) balance of $17,250 which reflected a $41,800 taxabletemporary difference related to depreciation and another $15,700taxable temporary difference related to accrual-basis salesdifferences. Cougar had a deferred tax asset (DTA) balance of$14,850 related to a $49,500 deductible temporary differenceresulting 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% forall future tax years beginning in 2017.
Required:
1) Compute Cougarâs taxable income for 2016. What are incometaxes payable for 2016?
2) Prepare Cougarâs journal entry to record income tax expensefor 2016 (assume no
valuation allowance existed as of the beginning of the year andis unnecessary at the end
of the year).
3) What is Cougarâs effective tax rate?
Related questions
| Q2. (6 pts), Assuming constant tax rates, pre-tax book incomeX the tax rate equals ___________________. Taxes paid in cash for the current year is the tax rateX ____________________. |
| Q3 (3 pts). A valuation account is used to: A. reduce a deferred tax liability. B. reduce a deferred tax asset. C. increase a deferred tax liability. D. increase a deferred tax asset. |
Q 4 (10 pts.) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 4.1 (4 pts.) For each example, indicate whichis higher in the current year, taxable income orpretax income? Assume the company is in its first year ofoperations. (You must get more than three correct to earn credit.)
4.2 (6 pts.) Check only one box for each of thesix items (temporary difference resulting in DTA or DTL; orpermanent difference). Must get more than two correct to getcredit.
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Ameen Company had the following balance sheet as of December 31,2014.
Ameen Company
Statement of Financial Position
December 31, 2014
(amounts are in millions)
| Cash 0 | Deferred Tax Liability 4 |
| Building 36 | TotalLiability 4 |
| Less: Accumulated Depreciation (6) | |
| BookValue 30 | CommonStock 10 |
| TotalAssets 30 | RetainedEarnings 16 |
| Total Shareholder's Equity 26 |
During 2015, Ameen had cash sales of $47 million
Ameen Company had previously purchased a building for $36 million.Ameen uses straight-line depreciation for financial statementreporting and MACRS for income tax reporting. At December 31, 2014,the carrying value of the building was $30 million and its taxbasis was $20 million. At December 31, 2015, the carrying value ofthe building was $28 million and its tax basis was $13 million. Thetax rate is 40%. There were no other temporary differences and nopermanent differences.
Required:
1. Provide the following journal entries
a. Recognize the sales
b. Recognize the depreciation expense
c. Recognize the tax accrual
d. Provide the supporting document to justify the tax accrual:
| Item | Amount |
| Pretax Financial Income | |
| Temporary Difference | |
| Taxable Income | |
| Taxes Payable |
e. Provide the statement of financial position for December 31,2015.
