Question

At December 31, 2016, Ozuna Inc. had the following deferred tax balances:

            Deferred tax liability – noncurrent                  $100,000

            Deferred tax asset – noncurrent                          80,000

            Valuation allowance                                               20,000

These deferred tax balances relate to two items.  First, Ozuna has recorded excess tax deductions related to its plant assets. At December 313, 2016, plant assets had a book value of $1,000,000 and a tax basis of $500,000.  Second, Ozuna had a NOL carryforward of $400,000 at December 31, 2016.  Ozuna determined the appropriate tax rate for recording deferred taxes at December 31, 2016 was 20%.

At December 31, 2017, we have the following information related to Ozuna’s year-end tax accrual:

Income before income tax on the income statement equals $600,000

Tax basis of plant assets equals $620,000

Book value of plant assets equals $1,300,000

The company began a premium plan on certain products it sells. The estimated liability for premiums has a $40,000 balance at 12/31/16.

Ozuna purchased 65% of the common stock of another entity during 2017 giving them control of that entity.  The acquisition was appropriately accounted for as a business combination with an acquisition date of January 3.  Included in the assets acquired, is the tradename of the acquired company.  This tradename was valued at $3 million in accounting for the business combination. The tradename can be renewed indefinitely and Ozuna’s plans are to renew for the foreseeable future.

Ozuna purchased bonds issued by the state of Iowa as a long-term investment in 2017.  Ozuna received $30,000 of interest on these bonds in 2017.

Because of increases in company profitability this year, Ozuna now projects that it is more likely than not that they will realize all benefits associated with any deferred tax assets the company records.

The company has determined that 25% is the appropriate tax rate for 2017 and all foreseeable future periods.

Ozuna has elected early application of the provisions of ASU 2015-17.

Required: Determine the following amounts:

a)        Total deferred tax liability at December 31, 2017

b)        Total deferred tax asset at December 31, 2017

c)        The presentation of deferred taxes on the December 31, 2017 balance sheet

d)        The amount of income tax expense recognized in the Income Statement for year ended December 31, 2017

e)        The total tax liability from the 2017 tax return

Answer 1

Requirement a

Total Deferred tax liability as at 31/12/17 $1,70,000/-((13,00,000-6,80,000)*25%)

Requirement b

Total Deferred tax assets as at 31/12/17 NIL ($4,00,000-$4,00,000)*25% Carry forwarded loss utislised

Requirement c
Balancesheet
Liabilities
Deferred tax liability	$ 1,70,000

Requirement d
Tax Eapenses
Current tax	$     50,000
Deferred tax liability	$     70,000
Reversal of deferred tax assets	$     80,000
Reversal of valuation allowance	$   (20,000)
Tax expenses recorded in books	$ 1,80,000

Requirement e
Income	$   6,00,000
Carried forwarded loss	$ (4,00,000)
	$   2,00,000
Tax	$       50,000