Question

hi there can someone explain how these solutions were derived for the below

3 of 3 4. JMR Corporation suffered a loss in 2016. As a result, the Corporation has a $100,000 accumulated loss carry forward at the tax rate of 40%The benefit was recorded in the accounts in 2016 as JMR believed it was more likely than not to be realized in 2017 the tax rate goes down to 38% and JMR has not yet used the benefit. Which of the following statements about the impact of the decline in tax rates on deferred tax asset-loss camy forward is true A No change to the accounts is necessary B. Income tax expenses should be decreased by $2,000 to recognise the increase in the deferred tax assets-loss carryforward Deferred income tax asset-loss carry forward should be decreased by $2.000 D. Income tax expense should be decreased by $38.000 E None of the above 5. Ryan Company paid golf dues on behalf of their two top employees. This is an example of a A Temporary difference Reversing difference Permanent difference D. Fully deductible for income tax purposes

Answer 1

First of all we should understand, types of differences :

Permanent difference and second one Temporary difference

1. Permanent difference is a difference between the tax expense and tax payable caused by an item that does not reverse over time.

2. Temporary differences are differences between pretax book income and taxable income that will eventually reverse itself or be eliminated.

Due to Temporary differences the concept of deferred tax asset and deferred tax liability come into picture.

Deferred tax asset  can refer to a situation where a business has overpaid taxes or taxes paid in advance on its balance sheet. These taxes are eventually returned to the business in the form of tax relief, and the over-payment is, therefore, an asset for the company.

Answer to Questions.

Question No.4

In the year 2016 corporation suffered with loss of $100000, which can be carry forwarded. So, corporation have $40000 ($100000*40%) as deferred tax asset as at balance sheet for the year ended 2016. But in the year 2017 tax rate is reduced from 40% to 38%. So, deferred tax assets amount will reduced by $2000 ($40000 - $100000*38%)

Answer will be. (C)

Question No.5

Payments of golf dues on behalf of employees, for which there is no chance for reversal in future ( Refer meaning of permanent difference above)

Answer will be. (C)