Schweser Tax

Indata Company sold a specially manufactured item for $5,000,000 on December 31, 2006. The item was sold on an installment sale basis, with $1,000,000 paid on the date of the sale and $4,000,000 to be paid in four annual installments of $1,000,000 plus interest at the market rate of 6 percent. Indata’s tax rate is 40 percent and its costs to construct the item were $2,500,000. Indata recognizes the entire amount of the sale as income on the date the sale is made for accounting purposes, but not until cash is received for tax purposes. On its balance sheet dated December 31, 2006, Indata will, as a result of the transaction described above, increase its deferred tax: A) liability by $200,000. B) asset by $800,000. C) asset by $200,000. D) liability by $800,000. Answer was D) liability by $800,000. Accounting profit from the installment sale was ($5,000,000 - $2,500,000 =) $2,500,000. Income tax expense is calculated based on 40 percent of accounting profit, so tax expense from the transaction is ($2,500,000 * 0.40 =) $1,000,000. Income taxes payable, as of December 31, 2006, were (($1,000,000 – ($2,500,000 * $1,000,000 / $5,000,000)) * 0.40 =) $200,000. The excess of income tax expense over income taxes payable is a credit to deferred tax liability of ($1,000,000 - $200,000 =) $800,000. Can someone explain what these numbers are? Income Tax Payable = (($1,000,000 – ($2,500,000 * $1,000,000 / $5,000,000)) * 0.40 = $200,000. Is it: (Cash received - (1/5th of total cost)) * Tax rate ?

Yes… this is matching the expenses. so 1/5 of 2.5m =.5m. You recognize 1m income every year and so you do your expenses. So your Receivables are 5m, your contractuals are 4m netting to 1m in Y1. Recognized income 1m Recognized exp .5m Net income (if none other), exposed to Tax = .5*.4(tax rate)=200k.

so is the answer A or D???

D… you defer the rest of the 1m (2.5m*.4) of the taxes

An analyst gathered the following data for Alice Company. Alice Company reported a pretax income of $400,000 in its income statement for the period ended 31 December 2002 . Included in its pretax income are: (1) interest received on tax-free municipal bonds $50,000 and (2) rent expense of $20,000. (Only $10,000 was paid in cash for rent during 2002). Alice follows cash basis for tax reporting. Assume a tax rate of 40%. What is the income tax expense that Alice should report on its income statement for the year ended 31 December 2002? A) $132,000. B) $144,000. C) $140,000. D) $160,000. Ans: C $400,000 – 50,000 = $350,000. $350,000 × 40% = $140,000 My question: How come rent expense was not deducted ? -------------------------------------------------------------------------------- Based on the information provided, which of the following is TRUE with respect to deferred tax during 2002? Deferred tax: A) will remain unchanged. B) asset will decrease by $4000. C) liability will increase by $4,000. D) asset will increase by $4,000. Ans:D Since only $10,000 of the rent expense will be allowed per tax returns, a deferred tax asset of $4,000 will result ($10,000 × 40%). My question: I thought this is a liability since only $10,000 was taxed in the year which means that they are liable to pay tax on the other $10,000 in future?

  1. “Included in its pretax income are”… so the rent expense is already deducted… $350k is net inc exp to tax. 2) Since 20k expense was recognized and due to cash basis, only 10k was expensed the first year, the rem. would become a tax asset for 4k. 10k was deducted – not taxed. The company is going to need to deduct another 10k when it recognizes the expense.

whats cash basis?