Question

a. During 2015: sold inventory to account for $500,000.

b. During 2015: The cost of goods sold in part a. is is $400,000.

c. During 2015: Estimated that uncollectible accounts on goods sold in part a will equal 2% of selling price.

d. During 2015: Estimated that warranty claims on goods sold in part a will equal 4% of selling price.

e. During 2015: Actual accounts written off as uncollectible totaled $3,000.

f. During 2015: Actual cash expenditures on warranty claims totaled $8,000.

g. Dec. 31,2015: Recognized income tax effects of preceding six transactions.

  The income tax rate is 40%. The income tax law permits a deduction for uncollectible accounts when a firm writes off accounts as uncollectable and for warranty claims when a firm makes warranty expenditures. Assume that any tax is paid in cash immediately

Answer 1

Answer;

According to the give Question ,I have to be answer as per Income Statement and Income Tax Return.

As Per Income Statement; (Partial Format)

Particulars	$	Amount ($)
Sales		$500000
Less; Cost of Goods Sold		-$400000
Gross Profit		$100000
Bad Debts written off		-$3000
Provision for Bad debts		-$7000
Provision for warranty Claims		-$20000
Net Profit before Tax		$70000
Income Tax @ 40%		-$28000
Net Profit after Tax		$42000

As Per Income Tax Return (Partial Format)

Particulars	$	Amount ($)
Sales		$500000
Less; Cost of Goods Sold		-$400000
Gross Profit		$100000
Bad Debts written off		-$3000
Provision for Bad debts		-$0
Expenditure of warranty Claims (Incurred only not Estimated)		-$8000
Net Profit before Tax		$89000
Income Tax @ 40%		-$35600
Net Profit after Tax		$53400

Deferred Tax Asset = Net Profit as per Income Statement(NPIS) - Net Profit as per Tax Return(NPTR)

= $42000 - $53400

= - $11400 (NPTR > NPIS)

The company has to be paid tax immediately $11400 in cash more compared to Income statement i.e As per Tax Return

Explanations;

Deferred tax assets are arise when there is a difference between accounting rules and tax rules. For Instance,deferred taxes exist when expenses are recognized in the income statement before they are required to be recognized by the tax authorities or when revenue is subject to taxes before it is taxable in the Income statement.

1. In the given Question ,the Estimated warranty expenses are fully charged to Income Statement without bothering about amount of cash Expenditure Incurred on warranty Expenses. But in Income Tax Return ,the department allows to be consider only Cash Expenditure Incurred on warranty Expenses.Because of these Differences,Deferred Tax Asset has arisen for additional Payment of tax compared to Tax in Income Statement.
2.Same way Provision for bad debts are not allowed by Income Tax Dept .So, we have to pay tax on that amount also.In subsequent periods ,if any Bad debts or warranty Expenses incurred we are allowed to be adjust with that Deferred Tax Asset.(DTA).

3.Deferred Tax asset is arise when there is a difference in Net profit in Tax Return Compared to Net Profit in Income Statement.

THANK YOU!