Question

In the first year of operations in 2019, the pretax accounting income of Dakota Company was $42,500. The following items may cause differences between pre-tax accounting income and taxable income. (1) $33,000 in warranty expense was recognized as product sales were made in 2019, according to GAAP, but will be deductible for tax purposes only when the actual disbursements are made. Only $5,000 was paid for warranty claims in 2019. The remainder of the payments related to the 3-year warranty are expected to occur as follows: Future Warranty Year Payments 2020 18,200 2021 10,300 2022 3,500 $28,000 (2) The income statement reflected a $5,500 expense for a premium for life insurance covering the firm’s president, with Dakota named as beneficiary, which is not deductible for tax purposes. (3) During 2019, Dakota collected $60,000 in advance of consulting services to be provided over the next three years. The entire amount is taxable in 2019, but will be recognized in revenue as the services are provided. Only $15,000 was actually earned in 2019 and included in income. (4) Dakota records $22,000 more depreciation expense for tax purposes than for accounting financial statements, and it is not expected to start reversing in the near future. The enacted tax rate for 2019 is 21%; the enacted tax rate is 24% for 2020 and future years.

Answer 1

Answer:

Taxable Income................99,000

Tax at 21% (0.21 x 99k)   (20,790)

Net Income.......................78,210

Explanation:

In 2019

                   Particulars                           $

                   Pretax Income....................42,500

Add back:   Warranty expense............28,000

                    Insurance Premium ........  5,500

                    Consulting Services ........45,000

Less:             Additional Depreciation(22,000)

                    Taxable Income................99,000

                    Tax at 21% (0.21 x 99k)   (20,790)

                    Net Income.......................78,210

2. Notice that Pretax Income is lower than Taxable income which will give rise to a deferred tax asset (because in relation to pretax income it means we are paying more tax than normal now, so that we will pay less in future) that will be reported on the current asset side of the balance sheet.