Case 12-7 Accounting for Income Taxes: Different Approaches Mark or Make is a bourbon distillery. Sales have been steady for the past three years, and operating costs have remained unchanged. On January 1, 2019, Mark or Make took advantage of a special deal to prepay its rent for three years at a substantial savings. The amount of the prepayment was $60,000. The income statement items (excluding the rent) are shown here. 2019 2020 2021 Gross profit on sales 350,000 349,000 351,000 Operating expense 210,000 210,000 210,000 Assume that the rental is deducted on the corporate tax purposes in 2019 and that there are no other temporary differences between taxable income and pretax accounting income. In addition, there are no permanent differences between taxable income and pretax accounting income. The corporate tax rate for all three years is 30%. Required: For years 2019 and 2020, Mark or Make reported net income applying the concept of comprehensive interperiod income tax allocation. During 2020, Congress passed a new tax law that will increase the corporate tax rate from 30 to 33%. Reconstruct the income statements for 2020 and 2019 under the following assumptions: Mark or Make uses the deferred method to account for interperiod income tax allocation. Mark or Make uses the asset–liability approach to account for interperiod income tax allocation.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Case 12-7 Accounting for Income Taxes: Different Approaches

Mark or Make is a bourbon distillery. Sales have been steady for the past three years, and operating costs have remained unchanged. On January 1, 2019, Mark or Make took advantage of a special deal to prepay its rent for three years at a substantial savings. The amount of the prepayment was $60,000. The income statement items (excluding the rent) are shown here.

	2019	2020	2021
Gross profit on sales	350,000	349,000	351,000
Operating expense	210,000	210,000	210,000

Assume that the rental is deducted on the corporate tax purposes in 2019 and that there are no other temporary differences between taxable income and pretax accounting income. In addition, there are no permanent differences between taxable income and pretax accounting income. The corporate tax rate for all three years is 30%.

Required:

For years 2019 and 2020, Mark or Make reported net income applying the concept of comprehensive interperiod income tax allocation. During 2020, Congress passed a new tax law that will increase the corporate tax rate from 30 to 33%. Reconstruct the income statements for 2020 and 2019 under the following assumptions:
1. Mark or Make uses the deferred method to account for interperiod income tax allocation.
2. Mark or Make uses the asset–liability approach to account for interperiod income tax allocation.

Particulars
2019
2020
2021
Gross profit on sales
3,50,000 3,49,000 3,51,000
Less: operating expenses -2,10,000 -2,10,000 -2,10,000
1,40,000 1,39,000 1,41,000
Gross revenue
Rent
-60,000
-60,000
-60,000
81,000
Revenue after rent
80,000
79,000
Less: Tax @ 33%
-26,400
-26,070
-26,730
Net Income
53,600
52,930
54,270

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