Question

In its 2013 financial accounting income, Jasper Inc. reports municipal bond interest income of $5,000 and warranty expense of $18,000. For tax purposes, the municipal bond interest is non- taxable and the warranty costs are deducted at the rate of $4,500 per year as the costs are incurred. Jasper has no other differences between PTFI and TI over the four year period. The table below summarizes tax and financial income for Jasper from 2013 to 2016: Tax reporting Revenues over deductions Warranty costs incurred Taxable income 2013 $25,000 (4,500) 20,500 2014 $17,000 (4,500) 12,500 2015 2016 $18,000 $19,000 (4.500) (4,500) 13,500 14,500 Financial reporting Revenues over expensessuses copes Municipal interest income Warranty expense accrued Pretax financial income 2013 2014 2015 2016 $25,000 $17,000 $18,000 $19,000 5,000 -0- -O -0- (18.000) Proper -O- Sett -0- -0- 12,000 17,000 18,000 19,000

Use the information above to answer the following question.

Hi can someone help me with this question? I tried to solve but I don't know if I did it right?

my work:

I subtracted the pretax financial income from the taxable income and i got:

7000 - 20,500 = 13,500 x 0.30= -4050 <---- i got 7000 b/c I deducted 5000 from 12,000 since it says municipal interest income is non - taxable. I then subtracted 20,500 taxable income from 7000 pretax financial income but got a negative 4050 instead of positive 4050? did I do that wrong? Am I supposed to get a positive 4050? the answer says 4050 but it shows it as positive.

If I did something wrong please correct me and show your work. Please help and thanks in advance!

Answer 1

There are two of differences between the financial income and taxable income.

First which is timing difference and another one is permanent difference.

For the purpose of computing DTA/ DTL we consider only the timing difference not the permanent difference.

In the given question we would not consider the difference arises due to interest, because it's is permanent in nature.

Computation of DTA.

DTA = (Warranty expense as per Financial - Warranty expense as per Tax Reporting) * 30%

= (18000-4500) * 30%

=13500 * 30%

=4050 DTA

We have to pay tax on higher income on 12/31/2013. because we have allowed lower expense deduction in 2013, resultant in higher taxable income or higher tax. which we adjust in subsequent 2014,2015, 2016 and 2017. hence its my assets as on 2013.