Access over 20 million homework & study documents

search

Vijil Corp is at the end of its first year of operations It report

Content type
User Generated
Rating
Showing Page:
1/5
Vijil Corp. is at the end of its first year of operations. It
reported $800,000 of pretax financial income. Assume a
tax rate of 35%. It has the following information relating to
taxes in 2014:
Vijil recorded $7,000 of interest revenue on municipal
bonds.
Depreciation on machinery amounted to $28,000 using
straight-line for financial reporting. Under MACRS, the
depreciation deduction was $36,000 on the tax return.
Two years of rent income of $40,000 was collected in 2014
and included on the tax return. For financial purposes, it
will be earned evenly over 2015 and 2016.
For 2014, Vijil reported $9,500 of warranty expense on the
income statement. The company
Solution
4-1
a. Interest on Municipal Bonds :- It is an item of permanent
difference as this income will not become liable to tax in
future at all and will always be exempt from taxation.
Hence, the effect will never be reversed. Therefore, no
need for any Deferred Tax Effect.
b. Depreciation on Macinery :- It is an item of temporary
nature, as the effect will be reversed in future years.
Hence, there is a requirement of giving Deferred Tax

Sign up to view the full document!

lock_open Sign Up
Showing Page:
2/5
Effect. Depreciation Expense as per Fiancial Statement is
less and as per Income Tax Purpose is higher hence, there
will be a Defrred Tax Liability.
Difference in Both amounts = 36000 - 28000 = 8000
Therefore, Deferred Tax Liability = 8000 X 35% = $ 2800
c. Prereceived Rental Income :- It is an item of temporary
nature, as the effect will be reversed in future years.
Hence, there is a requirement of giving Deferred Tax
Effect. Rental Income in financial statement is NIL as
against $ 40000 in the tax books. Therefore, there will be
Deferred Tax Asset.
Difference in Both amounts = 40000 - NIL = 40000
Therefore, Deferred Tax Asset = 40000 X 35% = $ 14000
d. Warranty Expenses :- It is an item of temporary nature,
as the effect will be reversed in future years. Hence, there
is a requirement of giving Deferred Tax Effect. Warranty
Expense as per Fiancial Statement is higher and as per
Income Tax Purpose is less hence, there will be a Defrred
Tax Asset.
Difference in Both amounts = 9500 - 6250 = 3250
Therefore, Deferred Tax Liability = 3250 X 35% = $
1137.50
e. Fines For Violating Labour Laws :- It is an item of
permanent difference as this expense will always be dis-
allowed for taxation purposes. Hence, the effect will never

Sign up to view the full document!

lock_open Sign Up
Showing Page:
3/5

Sign up to view the full document!

lock_open Sign Up
End of Preview - Want to read all 5 pages?
Access Now
Unformatted Attachment Preview
Vijil Corp. is at the end of its first year of operations. It reported $800,000 of pretax financial income. Assume a tax rate of 35%. It has the following information relating to taxes in 2014: Vijil recorded $7,000 of interest revenue on municipal bonds. Depreciation on machinery amounted to $28,000 using straight-line for financial reporting. Under MACRS, the depreciation deduction was $36,000 on the tax return. Two years of rent income of $40,000 was collected in 2014 and included on the tax return. For financial purposes, it will be earned evenly over 2015 and 2016. For 2014, Vijil reported $9,500 of warranty expense on the income statement. The company Solution 4-1 a. Interest on Municipal Bonds : - It is an item of permanent difference as this income will not become liable to tax in future at all and will always be exempt from taxation. Hence, the effect will never be reversed. Therefore, no need for any Deferred Tax Effect. b. Depreciation on Macinery :- It is an item of temporary nature, as the effect will be reversed in future years. Hence, there is a requirement of giving Deferred Tax Effect. Depreciation Expense as per Fiancial Statement is less and as per Income Tax Purpose is higher hence, there will be a Defrred Tax Liability. Difference in Both amounts = 36000 - 28000 = 8000 Therefore, Deferred Tax Liability = 8000 X 35% = $ 2800 c. Prereceived Rental Income : - It is an item of temporary nature, as the effect will be reversed in future years. Hence, there ...
Purchase document to see full attachment
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Anonymous
Great content here. Definitely a returning customer.

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4