(Solution) 16 - 54 Part 3 Additional Activities Of A Business EOC 2. For The Year Ended December 31, 2013, Grim Co.'s Pretax Financial Statement Income Was... | Snapessays.com


(Solution) 16 - 54 Part 3 Additional Activities of a Business EOC 2. For the year ended December 31, 2013, Grim Co.'s pretax financial statement income was...


Please answer Case 16-56 from the attachments16

 

- 54

 

Part 3

 

Additional Activities of a Business

 

EOC

 

2.

 

For the year ended December 31, 2013, Grim Co.’s pretax financial statement

 

income was $200,000 and its taxable income was $150,000. The difference is

 

due to the following:

 

Interest on municipal bonds

 

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

 

$ 70,000

 

Premium expense on keyman life insurance

 

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

 

(20,000)

 

Total

 

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

 

$ 50,000

 

Grim’s enacted income tax is 30%. In its 2013 income statement, what amount

 

should Grim report as current provision for income tax expense?

 

(a) $45,000

 

(c) $60,000

 

(b) $51,000

 

(d) $66,000

 

CASES

 

What Are Deferred Income Taxes?

 

Hurst Inc. is a new corporation that has just completed a highly successful first year

 

of operations. Hurst is a privately held corporation, but its president, Byron Hurst, has

 

indicated that if the company continues to do as well for the next four or five years, it

 

will go public. By all indications, the company should continue to be highly profitable on

 

both a short-term and a long-term basis.

 

The controller of the new company, Lori James, plans on using the MACRS method

 

of depreciating Hurst’s assets and using the installment sales method of recognizing

 

income for tax purposes. For financial statement presentation, straight-line depreciation

 

will be used, and all sales will be fully recognized in the year of sale. There are no other

 

differences between book and taxable income.

 

Hurst has hired your firm to prepare its financial statements. You are now preparing

 

the income statement. The controller wants to show, as income tax expense, the amount

 

of the tax liability actually due. “After all,” James reasons, “that’s the amount we’ll actu-

 

ally pay, and in light of our plans for continued expansion, it’s highly unlikely that the

 

temporary differences will ever reverse.”

 

Draft a memo to the controller outlining your reaction to the plan. Give reasons in

 

support of your decision.

 

Why Aren’t Deferred Taxes Discounted?

 

Tyler Dee is the controller for Martinez Company, a major employer in the area. Tyler has

 

just come from a meeting of a local civic group. The meeting was an opportunity for

 

Tyler to present and explain Martinez’s financial statements for the fiscal year recently

 

ended. A significant amount of time was spent discussing the large deferred tax liability

 

reported by Martinez. Several members of the civic group questioned Tyler about the

 

nature of this liability. In particular, Tyler was asked why the liability wasn’t discounted to

 

reflect the time value of money. Tyler had no real answer, except to mumble something

 

like, “That’s just the way the standard is written.”

 

How might Tyler have better explained the lack of discounting of deferred taxes?

 

Raising Tax Rates: Does It Help Me or Hurt Me?

 

When the corporate tax rate was lowered from 46% to 34% in 1986, most firms that

 

had adopted the asset and liability method of deferred tax accounting reported one-

 

time gains as a result of the revaluation of their deferred tax items. In fact, one writer

 

claimed that this lowering of income tax rates “freed a large chunk of money that had

 

been accumulated to pay deferred taxes at the former higher rate.”

 

In early 1993, Congress was considering raising the corporate income tax rate.

 

One proposal was to raise the top corporate rate from 34% to 36%. Accounting experts

 

pointed out that the increase in the tax rate would cause some firms to report one-time

 

losses and other firms to report one-time gains.

 

Discussion

 

Case 16-54

 

Discussion

 

Case 16-55

 

Discussion

 

Case 16-56

 


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