Question

QUESTION 45 There are several differences between the accounting methods the Roberts Corporation uses in the preparation of its financial statements and in the preparation of its federal income taxes return. For the year ended December 31 the company's taxable income on its income statement was $290,000, while it was $180,000 for income taxes purposes. For simplification, assume that the income taxes rate is 40% Calculate the deferred income taxes liability the Corporation would report a $116,000 b. $72,000 c. $44,000 d. $28,000 QUESTION 46 The Kerlene Corporation is considering a plan in which it would increase the size of its operations. As a result of the increased operations, without considering the cost of borrowing, the company expects income before taxes to increase by $3,000,000 per year in years 1-3, and $5,000,000 per year in years 4-9. To increase its operations the company would issue $30,000,000, 11%, 9-year bonds. The company expects to be able to issue the bonds at their principal Calculate the Corporation's total expected 9-year increase in income before taxes after considering the cost of borrowing. a. $3,300,000 decrease b. $9,300,000 increase c. $29,700,000 decrease d. $39,000 increase

Answer 1

Solution Question #45 Step-1: Computation of Future taxable timing differences Taxable income as per income statement Taxable income for income tax pusposes Future taxable timing differences ($290,000 - $180,000) $290,000 $180,000 $110,000 Step-2: Computation of Deferred income tax liability Future taxable timing differences Income tax rate Deferred tax liability ($110,000 x 40%) $110,000 40% $44,000 The correct option is, c. $44,000 Question #46 Step-1: Computation of cost of borrowing for Years through 1-9 Issue of Bonds at Par Coupon rate of interest $30,000,000 11% (Since, the bonds are issued at par, the interest expense for each year shall be equal to the interest payment made.) Interest expense (yearly) = $30,000,000 x 11% = Total interest expense for years 1-9 ($3,300,000 x 9 Years) $3,300,000 $29,700,000 Step-2: Computation of total 9-year increase in income before taxes after considering the cost of borrowing Increase in income before taxes per year in years 1-3 Total increase in income in Years 1-3 ($3,000,000 x 3) $3,000,000 $9,000,000 Increase in income before taxes per year in years 4-9 Total increase in income in Years 4-9 ($5,000,000 x 6) $5,000,000 $30,000,000 $39,000,000 Total increase in income before taxes in Years 1-9 ($9,000,000+ $30,000,000) Less: Total interest expense for years 1-9 Net increase in income before taxes for years 1-9 ($29,700,000) $9,300,000 The correct option is, b. $9,300,000 increase