Question

Monty Company began operations at the beginning of 2018. The following information pertains to this company. 1. Pretax financial income for 2018 is $85,000. 2. The tax rate enacted for 2018 and future years is 40% 3. Differences between the 2018 income statement and tax return are listed below: (a) Warranty expense accrued for financial reporting purposes amounts to $6,900. Warranty deductions per the tax retur amount to $2,100. (b) Gross profit on construction contracts using the percentage of completion method per books amounts to $90,200. Gross profit on construction contracts for tax purposes amounts to $73,000. (c) Depreciation of property, plant, and equipment for financial reporting purposes amounts to $64,300. Depreciation of these assets amounts to $76,900 for the tax return. (d) A $3,300 fine paid for violation of pollution laws was deducted in computing pretax financial income. (e) Interest revenue recognized on an investment in tax-exempt municipal bonds amounts to $1,400. 4. Taxable income is expected for the next few years. (Assume (a) is short-term in nature; assume (b) and (c) are long-term nature.)

Answer 1

Solution b:

The deferred tax liability = (Excess of depreciation as per tax + Excess of Gross profit on construction contract recognized in books)*Tax rate

= [($76,900 - $64,300) + ($90,200 - $73,000)]*40%

= $11,920

Deferred tax assets = Excess of warranty expense as per books over tax * Tax rate

= ($6,900 - $2,100) *40% = $1,920