A06 Intermediate Accounting II
Part A (40 points)
Colorado Company has provided you the following information.
Income tax rate
2014 $390,000 35%
2015 $320,000 37%
2016 $400,000 40%
2017 ($1,200,000) 40%
Colorado Company has decided to use the loss carryback and carryforward provision as a result of the year 2017 loss. The enacted tax rate remains at 40% after year 2017. Colorado Company has determined that a valuation allowance is not necessary.
Prepare the journal entry on December 31, 2017 to record the carryback and carryforward decision.
Part B (30 points)
The Matrix Company began operations as of the beginningof 2015. During 2015, Matrix reported GAAP (book) income before taxes of $789,500. For income tax purposes, depreciation expense was $150,000; for GAAP (book) purposes, depreciation expense was $74,000. Matrix accrued $900,000 of revenue for GAAP (book) purposes during 2015; $600,000 of the accrued revenue was taxable during 2015. Matrix earned interest of $79,800 from a municipal bond investment during 2015. Matrixs marginal income tax rate is 40%. Matrix did not make any income tax payments during 2015.
a. Determine Matrixs taxable income for the year ended December 31, 2015.
b. Prepare the 2015 year-end journal entry to record income tax expense.
Part C (30 points)
a. For each of the items below, determine whether the items are temporary differences or permanent differences. Also, for each temporary difference, you are required to determine whether a deferred tax asset or deferred tax liability is created by the temporary difference described. Assume that each of the temporary differences described is an originating difference.
1. Municipal bond interest
2. Accrued warranty expense
3. Sales revenues received in advance
4. Prepaid insurance where the tax deduction in future years will be less than the book expense
5. Tax depreciation expense exceeds GAAP (book) depreciation expense
6. Accrued bad debt expense
7. The dividends received deduction
8. Installment sales revenue (recognized currently for GAAP, recognized for tax purposes when cash is collected in future years)
9. Life insurance payments for executives for which the company is the beneficiary
10. Fines paid for law violations
b. Explain why temporary differences result in deferred tax assets or deferred tax liabilities while permanent differences do not, and describe the difference in the formation of deferred tax assets and deferred tax liabilities.
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