Question

scenario
SuperSports Inc.reported pretax financial income of $260,000 for the year 2016. Taxable income of SuperSports is however different from its pretax financial income because of the items given below.

Depreciation deducted on the tax return is $40,000 greater than the depreciation charged on Income Statement.
Estimated Warranties Expenses charged to Income Statement is $30,000 but Warranties expenses deductible on tax return are $20,000
$3,200 appear in the income statement of SuperSports as Fines and penalties paid.
SuperSports received $ 6,000 interest from Tax Saving Municipal Bonds.
Enacted Tax Rate for the year 2016 is 30% and for 2017 is 35%

Required: For the year 2016, SuperSports Inc. requests you to:

Identify items of permanent and temporary difference from the information given
What items of temporary difference result in future taxable amounts and what items will result in future deductible amounts
Compute Taxable Income
Compute current income tax expense/Tax payable
Compute deferred taxes ( Deferred Tax Liability and Deferred Tax Asset)
Record journal entry for Income Tax Expense
Show how deferred taxes will be reported in the Balance Sheet.

Case Study Part B
SuperSports provides you the following pension data for the year 2016.

Item     
Service Cost, 2016   $248,000
Projected Benefit Obligation, January 2016   $340,000
Plan assets (fair value), Januray 1, 2016   $360,000
Prior Service Cost - AOCI (2016 amoritization, $25,000)   $250,000
Net Loss - AOCI (2016 amoritization, $10,000)   $110,000
Actual Return on Plan Assets   $45,000
Interest rate and expected return on plan assets   10%
Contributions made to plan assets during 2016  
$175,000

SuperSports requests you to:

Compute pension expense for the year 2016
Record 2016 journal entry for pension expense

Answer 1

Since, multiple questions have been posted, I have all the parts of Question 1.

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Question 1:

The items of permanent and temporary difference are given as below:

Items of Permanent Difference = Interest on Municipal Bonds and Fines and Penalties [these items will never get reported on the tax return and will have no tax related effects]

Items of Temporary Difference = Warranties Expenses and Depreciation

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Question 2:

The item that will result in future taxable amounts is Depreciation. (as the amount of depreciation charged on the income statement is less than the value reported on the tax return)

The item that will result in future deductible amounts is Warranty Expense. (because the value of warranty expense charged on the income statement is more than the amount reported on the tax return)

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Question 3:

The value of taxable income is arrived as below:

Pretax Accounting Income	260,000
Temporary Differences:
Depreciation	-40,000
Warranty Expense	20,000
Taxable Income	$240,000

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Question 4:

The value of current income tax expense/tax payable is calculated as follows:

Current Income Tax Expense/Tax Payable = Taxable Income*Current Tax Rate = 240,000*30% = $72,000

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Question 5:

The value of deferred taxes is determined as below:

	Future Taxable Amount	Future Deductible Amount
Depreciation	40,000
Warranty Expense		30,000
Applicable Tax Rate	30%	30%
Deferred Tax Liability	$12,000 (40,000*30%)
Deferred Tax Asset		$9,000 (30,000*30%)

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Question 6:

The journal entry to record income tax expense is given as follows:

Account Titles	Debit	Credit
Income Tax Expense	$81,000
Deferred Tax Asset		$9,000
Income Tax Payable		$72,000

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Question 7:

The balance sheet presentation of deferred taxes is provided as below:

Balance Sheet
Assets:
Current Assets:
Deferred Tax Asset	$9,000
Liabilities:
Long Term Liability:
Deferred Tax Liability	$12,000