Question

Beginning of year 1

Purchased 1,000 shares of D Corp. for $30 per share. The shares are classified as available for sale securities.

D corp year-end share price:

Year 1: $20

Year 2: $24

Assume the following tax regulation:- Income from investments in equity securities is taxable when shares are sold and when dividends are received.

Other information: First assume a 30% tax rate and then assume that in year 2 Congress lowered the tax rate to 20% for year 3 and all subsequent years.

Income before tax year 1: $900,000

Income before tax year 2: $1,200,000

Please find the taxable income, deferred tax libility and deferred tax asset for year 1 and year 2?

Answer 1

		Year-1	Year-2
Income Before Tax		900000	1200000
Adjustment
Add loss on Available for sale securities		10000
=(30-20)*1000
Less gain on available for sale securities			-4000
=(24-20)*1000
Taxable Income		910000	1196000
Calculation of timing difference
Opening Balance		0	10000
Additions during Year		10000	0
Deletion during the year		0	4000
Total Timing Difference		10000	6000
Tax Rate		30%	20%
Deferred Tax Asset		3000	1200
Note-
Best effort have been made to answer the question correctly, in case of any discrepencies kindly comment and i will try to resolve it as soon as possible.
Please provide positive feedback.