Chapter 17, Problem 17.13P

Permanent Differences, Temporary Tax Differences, Change in Tax Rates, Reconciliation of Statutory Tax Rate to Effective Tax Rate, Classification of Deferred Tax Accounts, Disclosure. Simply Syrup Incorporated, a maple syrup maker reported the following events causing differences between pretax accounting income and taxable income during its first full year of operations

• In 2018, Simply Syrup purchased equipment costing $440,000 (with a useful life of 4 years and no salvage value) that it will depreciate on a straight-line basis for financial reporting purposes. Simply Syrup will use an accelerated method for tax purposes and depreciate $200,000 in the first year and $80,000 in the following 3 years (i.e. 2019 through 2021).
• On December 31, 2018, Simply Syrup collected $70,000 for future delivery of 3,500 cases of its Maple Light Syrup It is scheduled to deliver 2,100 cases in 2019 and the remainder in 2020.
• Simply Syrup invests in U S government securities to earn tax-free interest. In 2018, the company reported $8,000 of interest income from this investment on its income statement.
• Simply Syrup makes a promise to its customers: “We will give you a full refund if you are hospitalized after eating our syrup on your pancakes. Based on past experience, the company estimates that this warranty will cost 10% of sales. Sales of syrup in 2018 amounted to $100,000, and the firm recorded an accrued warranty expense of $10,000 The warranties expire in 1 year.
• In 2018. Simply Syrup insured the life of its president, Hill L. Minimon. The premiums paid amounted to $5,000. The company is the beneficiary.

Simply Syrup has a 40% tax rate and reported income before tax of $500,000 under GAAP for 2018.

Required

1. a. Compute income tax payable in 2018.
2. b. Determine the deferred tax asset and liability at the end of 2018.
3. c. Determine income tax expense for 2018 and prepare the journal entry or entries necessary to record the tax provision for the year. Record deferred tax assets and deferred tax liabilities separately.
4. d. Compute the 2018 effective tax rate and reconcile it to the statutory federal rate of 40% in both percentages and dollars.
5. e. Prepare the entry necessary in 2018 based on having obtained information that Simply Syrup will not realize one-half of the deferred tax asset over the reversal period.
6. f. Assume that the 2020 Congress enacts a new law on January 1, 2020, reducing the tax rate to 36% effective January 1, 2020. Assume also that Simply Syrup has no further warranty accruals and no warranty claims in 2019. Prepare the journal entry necessary on January 1, 2020, to reflect this tax rate change Record any deferred tax assets and deferred tax liabilities separately and ignore any allowance account for a deferred tax asset. Assume that planned reversals of deferred accounts were recorded in 2019.