ACCTG472_A6

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School

Pennsylvania State University *

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Course

472

Subject

Accounting

Date

Apr 3, 2024

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pdf

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Uploaded by CorporalSalmonMaster1105

Page 1 THE PENNSYLVANIA STATE UNIVERSITY Accounting 472 Intermediate Financial Accounting II – Spring 2024 Assignment #6 GENERAL INSTRUCTIONS: This assignment is due on Thursday, March 28 th at 8:00 p.m. Please submit the assignment in class or directly in the appropriate box in the Accounting Department office. Include your full name and student ID# on the first page of your assignment. Note that late assignments will not be accepted. Problem #1 Excess Tax Depreciation At the beginning of 2023, the Eastman Company purchased equipment for $800,0000. The economic life and salvage value for the equipment is 10 years and zero, respectively. For tax purposes, Eastman uses an accelerated depreciation method. This resulted in a tax benefit of $100,000. For financial reporting purposes, Eastman uses straight-line depreciation. The temporary difference because of the difference in depreciation will reverse in later years. Eastman had pre-tax accounting income of $2.2 million. The tax rate is 40% REQUIRED: 1. Compute taxable income for Eastman. Calculate income tax expense, any deferred tax amounts, and income tax payable for 2023. Prepare the journal entry for 2023. 2. Prepare a partial income statement and balance sheet for 2023. Problem #2 Change in Tax Rates During 2023, the Valley Produce Company reports taxable income and pre-tax accounting income of $800,000 and $550,000, respectively. The difference is attributable to temporary differences of: 1) Estimated litigation expense of $200,000 that is accrued for financial reporting purposes during 2023. Payment on the litigation is not expected until 2026. 2) Valley Produce collects advertising revenue of $50,000 from another company in advance during 2023. The advertising will be earned during 2024 and 2025 (in equal amounts). The current tax rate is 30%. However, the (enacted) tax rate for 2025 and later is 40%. This is the first year of operations for Valley Produce. REQUIRED:

Page 2 1. Calculate any deferred tax amounts and income tax payable, and prepare the journal entry for 2023. 2. Alternatively assume that the current tax rate is 40%. Calculate income tax expense, any deferred tax amounts, and income tax payable, and prepare the journal entry for 2023. Problem #3 Multiple Temporary Differences First Capital Company had the following temporary differences on their financial statements and tax return during 2023: • Warranty expense accrued of $40,000 during the year, but not expected to be paid in actual warranty claims until 2024 and 2025 (in equal amounts). • Prepaid subscriptions of $200,000 during the year that will be recognized as expense by First Capital during 2024. • Gross profit on installment sales of $120,000 was recognized for financial reporting purposes; however, the cash will be received in equal amounts during 2024-2026. The tax rate is 40%. First Capital reported taxable income of $620,000 during 2023, its first year of operations. REQUIRED: 1. For each temporary difference, indicate if they give rise to a future deductible or future taxable amount for First Capital. What is the amount of the related DTA and DTL that First Capital will have to recognize? 2. Calculate pre-tax accounting income for 2023. 3. Provide all required journal entries for 2023. 4. Prepare a (partial) balance sheet for 2023. Problem #4 NOL Carrybacks and Carryforwards The Red Truck Company reported the following taxable and financial income: 2018 $40,000 2019 $50,000 2020 $4,000 2021 ($70,000) 2022 $8,000 2023 $12,000 Red Truck chose to carryback and carryforward the NOL incurred during 2021. (Please follow the NOL carryback and carryforward rules. While the Tax Cuts and Jobs Act eliminated carrybacks for NOLs for most firms, some remain exempt (e.g., farming related business). The tax rate for 2018-2021 is 40%. During 2021, the enacted tax rate for 2022 and later became 35%. REQUIRED: Provide the journal entries for 2021-2023.

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