Question

Farmer Inc. began business on January 1, 2016. Its pretax financial income for the first 3 years was as follows: 2016 $360,000 2017 420,000 2018 (345,000) The following items caused the only differences between pretax financial income and taxable income. 1. In 2016, the company collected $310,000 of rent; of this amount, $100,000 was earned in 2016; the other $210,000 will be earned equally over the 2017-2018 period. The full $310,000 is included in taxable income in 2016 when the cash is received 2. The company pays $10,000 for life insurance on officers each year. 3. In 2016, the company terminated a top executive and agreed to $90,000 of severance pay. The amount will be paid $30,000 per year for 2016-2018. The entire amount was expensed for book purposes in 2016. For tax purposes, the severance pay is deductible as it is paid. The enacted tax rates are: 2016 35% 2017 40% 2018 21% What is taxable income in: What is net income in: 2016 2017 2018 2016 2017 2018 What is the deferred tax asset/liability balance for: 2016? 2017? 2018?

Answer 1

Calculation of taxable income.

For FY 2016.

As per books $3,60,000.

But same is included of rent of $3,10,000. and as per details given in question only $1,00,000 is earned in FY 16. So, to calculate taxable income we should deduct $2,10,000 from book income.'

As per point number 3 all the expenses id deducted from FY 16. But it is spread over 3 year. So, $60,000 should be added back in book income to calculate the taxable income.

Book income $3,60,000

(-)Rental income not earned $2,10,000

(+) Expenses not incurred $60,000

So, Gross total income income is $2,10,000.

Life insurance premium paid $10,000.

So, taxable income is $2,00,000.

Net tax=$2,00,000*.35

=$70,000.

As per books net tax=$3,60,000*.35

=$1,22,500.

So, deferred tax asset=$1,22,500-$70,000

=$52,500.

For FY 2017.

Book income $4,20,000

Add rental income $1,05,000

Less Expenses incurred $30,000

So, Gross taxable income $4,95,000

Insurance premium paid $10,000

Taxable income $4,85,000

Net Tax $4,85,000*.4

=$1,94,000.

As per books tax=$4,20,000*.4

=$1,68,000

So, Deferred tax asset=$(52,500-1,94,000+1,68,000)

=$26,500

For FY 18

Book income -$3,45,000

add rental income $1,05,000

Less Expenses incurred $30,000

Total taxable income -2,70,000

Insurance premium paid $10,000.

Taxable income -2,80,000.

Net tax=-2,80,000*.21

=-58,800. (Refund)

As per books tax=-3,45,000*.21

=-72,450

So, Deferred tax liability=26500+58800-72450

=$12,850