Question

ACC 85 Accounting for Income Taxes Comprehensive Example Your boss gives you the following information about Gunner Corporation and asks you to compute Gunner's tax provision for 2018 (see specific questions below): Book income before federal income taxes is $500,000 Book depreciation is $200,000 and MACRS depreciation is $300,000 Bad expense for book purposes is $20,000. Bad debt expense for tax purposes is $12,000 Included in book income is $50,000 of tax exempt bond interest. Book income includes $15,000 of non-deductible entertainment expense The corporate tax rate is 20%. 1. What is Gunner's taxable income? 2. What is Gunner's current income tax expense? 3. What is Gunner's deferred tax expense? 4. What is Gunner's total tax expense? 5. Does the difference between book and tax depreciation result in a deferred tax liability or a deferred tax asset on Gunner's balance sheet? 6. Prepare a rate reconciliation

Answer 1

Solution Gunner Corporation Income Tax Computation for the Year 2018 Amount ($) Accounting income before income ta:x $500,000 Permanent Difference Tax exempt Bond Interest income Non-deductible entertainment expenses Total Permanent Differences ($50,000) 15,000 ($35,000) Timing Differe Accelerated Capital allowance deduction ($300,000 $200,000) Bad debt expense disallowed for tax purpses ($20,000 - $12,000) Gross timing Differences ($100,000) 8,000 ($92,000 Taxable Income $373,000 Corporate tax rate 20% ax Current income tax expense on taxable income ($373,000 x 20%) Deferred tax expense on Gross timing difference ($92,000 x 20%) ## Total tax expense $74,600 18,400 93,000 ## The net timing differences are Taxable timing differences, hence deferred tax liability shall arise on it. What is Gunner's taxable income? Gunner's taxable is $373,000. Please refer the tax computation.

: What is Gunner's curren me tax nse? Gunner's current income tax expense is $74,600. Please refer the tax computation. : What is Gunner's deferred tax nse? Gunner's deferred tax expense is $18,400. Please refer the tax computation. 4: What is Gunner's total tax nse? Gunner's total tax expense is $93,000. Please refer the tax computation Req.5 Does the difference between book and tax depreciation result in a deferred tax liability or a deferred tax ass Gunner's balance sheet? Difference in book and tax depreciation is taxable timing difference since excess depreciation is allowed in tax computation. When this difference will reverse in future tax periods, it will result in tax liability Hence the difference between book and tax depreciation results in a deferred tax liability Prepare a rate reconciliation Year 2018 Applicable tax rate 20.00 ах that are deductible for tax pur Non-deductible entertainment expenses ($15,000 x 20% x 100/ $500,000) 0.60 Tax effect of Inco Tax exempt Bond Interest income ($50,000 x 20% x 100/ $500,000) me that are not taxable for tax pur (2.00) Average effective tax rate ($93,000 x 100 $500,000) 18.60