Question

The following differences exist between financial income and taxable income of Warhol Co. for the year ended December 31, 2020, its first year of operations. Warhol's pretax accounting income for 2020 is $800,000.  

1. Excess depreciation on tax returns, $48,000;
2. Accrual for litigation loss, $70,000. It is estimated that the litigation liability will be paid in 2024.
3. Unearned rent revenue deferred on the books but appropriately recognized in taxable income, $60,000.
4. Interest income from municipal bonds, $20,000.

1. Determine taxable income for 2020. Show computation.
2. For items 1)-4), indicate whether it involves a deferred tax asset, deferred tax liability, or permanent difference.

1):                 2):                    3):                   4):                    

Answer 1

Particulars	Amount
Book income	800,000
Less: excess depreciation on tax return	48,000
Add: Accrual for litigation loss	70,000
Add: unearned rent revenue	60,000
Less: interest from municipal bold non taxable	20,000
Total taxable income	862,000

Required b.

1) excess depreciation on tax return - Deferred tax liability

2) Accrual for litigation loss- Deferred tax asset

3) unearned rent revenue- Deferred tax asset

4) interest on municipal bond - permanent difference

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