Question

Yarman Inc. began business on January 1, 2000. Its pretax financial income for the first 2...

Yarman Inc. began business on January 1, 2000. Its pretax financial income for the first 2 years was as follows:

2000 $80,000
2001 $150,000

The following items caused the only differences between pretax financial income and taxable income.

(a) In 2000 the company collected $75,000 of rent; of this amount, $25,000 was earned in 2000; the other $50,000 will be earned equally over the 2001-2002 period. The full $75,000 was included in taxable income in 2000.

(b) The company pays $5,000 a year for life insurance on officers.

(c) In 2001 the company terminated a top executive and agreed to $30,000 of severance pay. The amount will be paid $10,000 per year for 2001-2003. The 2001 payment was made. The $30,000 was expensed in 2001. For tax purposes, the severance pay is deductible as it is paid.

The enacted tax rates existing at December 31, 2000 are:

2000 30% 2002 40%
2001 35% 2003 40%

Determine the net deferred tax asset, if any, as of December 31, 2001?

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Answer #1

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Deductible temporary difference at the end of 2001 = Rental income to be earned in 2002 + Severance pay deductible in 2002 and 2003

= $25,000 + $20,000 = $45,000

Net deferred tax assets as of December 31, 2001 = $45,000 * 40% = $18,000

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