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    Pretax Financial Income and Depreciation of Property

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    1) P19-9

    (Five differences, Compute, taxable Income and Deferred Taxes, Draft Income Statement. King Company began operations at the beginning of 2007. The following information pertains to this company.

    1- Pretax financial income for 2007 is $100,000.
    2- 2- The tax rate enacted for 2007 and future years is 40%
    3- Differences between the 2007 income statement and tax return are listed below:

    A) - Warranty expense accrued for financial reporting purposes amounts to $5,000. , Warranty deductions per the tax return amount to $2,000.
    b)-Gross profit on construction contracts using the percentage-of-completion method for books amounts to $92,000. Gross on constructions contracts for tax purposes amounts to $62,000.
    c)- Depreciation of property plant, and equipment for financial reporting purposes amounts $60,000. Depreciation of this assets amounts to $80,000 for the tax return.
    d)-A $35,000 fine paid for violation of pollution laws was deducted in computing pretax financial income.
    e) - Interest revenue earned on an investment in tax exempt municipal bonds amounts to $1,400. (Assume (a) is short term in nature; assume (b) and (c) are long term in nature)

    4- Taxable income is expected for the next few years.

    A- Compute taxable income for 2007
    B- Compute the deferred taxes at December 31, 2007, that relate to the temporary differences described above. Clearly label them as deferred tax asset or liability.
    C- Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2007.
    D- Draft the income tax expense section of the income statement beginning with "Income before income taxes".

    2) Comparative Analysis Case:
    The Coca-Cola Company and PepsiCo, Inc.

    Go to the KWW website and use information found there to answer the following questions related to The Coca-Cola Company and PepsiCo, Inc.

    a) What are the amounts of Coca Cola's and PepsiCo's provision for income taxes for the year 2004? Of each company's 2004 provision for income taxes, what portion is current expense and what portion is deferred expense.
    b) What amount of cash was paid in 2004 for income taxes by Coca Cola and by PepsiCo?
    c) What was the US federal statutory tax rate in 2004? What was the effective tax rate in 2004 for Coca Cola and PepsiCo? Why might their effective tax rates differ?
    d) For the year end 2004, what amounts were reported by Coca Cola and PepsiCo as (a) gross deferred tax assets and (b) gross deferred tax liabilities?
    e) Do either Coca Cola or PepsiCo disclose any net operating loss carrybacks and/or carryforwards at year-end 2004? What are the amounts, and when do the carryforwards expire?

    3)- L) Income Tax Acctg Exercise #1--- Please respond to any of L1 to L4 below.

    ABC Corp, a calendar year corp, started operations in 2006. It generated pretax financial income of $2,000,000 in 2006. In addition, here is the following information for 2006:

    -« Book depreciation expense of $550,000
    -« Tax depreciation of $810,000
    -« Allowance for bad debts of $110,000 at the end of 2006
    -« Estimated legal liability (current liability) of $240,000 where liability in not fixed at the end of 2006
    -« Meals and entertainment expense of $200,000
    -« Unearned revenues (current liability) of $300,000 at the end of 2006
    -« Assume a flat 40% income tax rate

    L1) Compute 2006 taxable income (in thousands of dollars for ease)---

    Thanks for the attempt, Mauricio. Your first one...depreciation...and your last one unearned revenues both look good. And one twist is that generally only 50% of meals and entertainment is tax deductible.

    L2) Make the income tax journal entry at the end of 2006--- Since this one is pretty challenging, let me give you a key check figure....Total income tax expense (DR) of 840K

    L3) Perform an income tax rate reconciliation (in %s) of the statutory tax rate (40.0% in this case) to the book effective tax rate for 2006 (the book effective tax rate is computed as follows: Total income tax expense / Consolidated pretax financial income.

    L4) Do you think a tax valuation allowance is needed at the end of 2006 in this situation? Why or why not?

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    Solution Summary

    The solution examines pretax financial income and the depreciation of properties.