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In the question the teacher says that " ACRS accelerated depreciation and flow-through of the investment credit will be used for tax calculation and payment purposes regardless of the method chosen for reporting to stockholders."
It looks like on the tax calculation worksheet you sent me, that you used accelerated for some, and straight line for others...shouldn't it be 120 across the board for depreciation there? That will affect our taxes payable I think, and will actually make option #3 look better, as it will have this lower payable. Right? Or am I missing something?
3)About the ITC and the balance sheet. I am so lost on this ITC thing. Yes, I think you are right...it should be an income item and should show up as deferred investment tax credit.
Here is what was discussed and what it says in the book.... Example, $200,000 machine qualifying for a $20,000 investment tax credit....
Flow through: Reduces reported income tax expense by the whole amount in that year..OK...no problem there. So here, tax liability will be decreased by $20,000. Record like this:
Income tax Liability.............20,000
Income tax Expense...................20,000.
So it decreases tax expense and increase net income by $20k.
Deferred: ITC is treated as a reduction in the cost of the asset (a true rebate). Spreads the tax credit over assets useful life. Reduces reported income tax expense in each year.
With deferred the ITC would initially be recorded as a deferred tax credit (a liability), analogous to unearned revenue.
Income tax liability..........20,000
Income Tax expense.................20,000
Entry has no effect on the income statement. In future years, income tax expense would decrease by $2k a year. The entry would be:
Deferred tax Credit.........2,000
Income Tax expense........2,000
So what does this mean for the balance sheet in my problem? How do I show that? What about any affect on cash flow statement?
I am attaching the original problem (attachment 2), and where we stand as of right now(attachment 1).
Can you check my financial statements and see if they make sense...and can you also help address the question of which method of presentation is the best...
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For income tax purposes, you should always use ACRS (in this case $120k) for depreciation expenses AND flow-through for ITC which should be $5k, to get the correct tax payable amount. When using deferal method, the ITC allocated for current year should be stated on the Income Statement while the difference remained in the Balance Sheet.
<br>Under normal circumstances, LIFO brings the ...
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