The following represents information about the first several years of operations.
– Year 2, financial income before tax: $100,000
– Warranty – Year one the company recorded warranty expense of $10,000. It will be paid in years two and three. Year two warranty expense was $8,000 to be paid in years three and four.
– In year two, the company accrued $15,000 for fines for an environmental spill which will be paid in year three.
– In year two, the company recognized $6,000 of municipal interest income.
– Deferred revenue in year one was $30,000 to be recognized in year two for book purposes.
– Company purchased a truck in year one for $33,000. It is depreciated over three years, 0 residual value, straight-line for book purposes. For tax purposes the company is allowed to expense the entire amount in the first year.
– DTA at the beginning of year two is $12,000.
– DTL at the beginning of year two is $6,600.
– The tax rate in years one and two was 30%. At the end of year two, Congress approved a tax rate increase to 40% for future years.
You were hired at the beginning of YEAR TWO. The person who did the work for year one, a former UP grad, was promoted. You are confident it was done correctly in the prior year.
a.Show how the beginning balance in the deferred tax liability account at year two was computed. (4 points)
b.Prepare a tax schedule for year two similar to that we did in class that computes taxes payable and ending balances in the deferred tax asset and deferred tax liability accounts. (22 points)
c. Prepare the journal entry that the company will make for year two. (6 points)
d.Prepare an income statement starting at Income before tax. (3 points)
e.What information is reported in the balance sheet as of the end of year two? Be clear whether it is an asset or liability, current or long term. (3 points)
f.Because of Covid, this year you became concerned about the ability to realize the benefits of deferred assets such that the company believes only 60% of the DTA will be realized. What additional journal entry should be made? And then, at what amount would the deferred accounts be reported on the financials? (4 points)
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