Question

Unitroj Inc., reported pretax financial accounting income in 2011, 2012, 2013 and 2014 of $100 million. In 2011, Unitroj purchased a machine for $100 million with a useful life of five years. The machine is depreciated based on the straight line method and the double declining balance method for tax purposes. No other depreciable assets were acquired. The enacted tax rate is 40% per year. Also in 2011, Unitroj recorded warranty expense of $30 million with $16 million paid in 2012 and $15 million in 2013 for merchandise returned by customers. Magazine subscriptions of $20 million were received in 2011 and the company will deliver $15 million in 2012 and $5 million in 2013.

Compensation expense of $3 million related to employee stock option plans granted to organizers was reported in the 2011 income statement. In addition, Unitroj received $1 million each year in interest income from investments in municipal bonds.

REQUIRED:

Determine the income tax expense for 2011 and 2012. Be sure to show supporting computations.

Provide the appropriate journal entries to recognize income tax in 2011 and 2012.

Provide proper financial statement disclosure of the deferred tax assets (if any) and deferred tax liabilities (if any) in Unitroj’s income statement and balance sheet.

Answer 1

Calculation of Current Tax

Year 2011

PBT $100 million

Add: Dep $20 million

Less: Dep $100 million

Taxable Income $20 million

Current Tax @ 40 % $8 million

Year 2012

PBT $100 million

Add: Dep $20 million

Less: Nil

Taxable Income $120 million

Current Tax @ 40 % $48 million

Calculation of Deferred Tax - year 2011

Opening Balance : Nil

Addition : $80 million

Deletions : Nil

Closing balance : $80 million

Deferred Tax liab : $32 million

Opening balance : nil

Transfer to P/L : $32 million

Calculation of Deferred Tax - year 2012

Opening Balance : $80 million

Addition : Nil

Deletions : $20 million

Closing balance: $60 million

Deferred tax asset: $24 million

Op. Balance: $32million

Less: transfer to P/L : $8million

Journal entries

2011

SPL 40

To Provision for current tax 8   

To Deferred Tax liab. 32