The Swirlie Suitcase Co. reported $600,000 income for the year 12/31/20xx. Consider the following additional information.
Swirlie had a deferred tax asset at the beginning of the year of $10,000. The Company used accelerated depreciation for tax purposes that results in a reduced asset basis of $12,000. Swirlie owns City of Cleveland bonds that yielded $45,000 interest income. In addition, the Company paid $11,000 to repair products sold that was still under warranty. Based on sales for 20xx, the Company anticipates that an additional warranty expense of $40,000 has been incurred.
Required: Assuming the tax rate, current and future, is 20%, how much income tax do they owe for 20xx?
Particulars | Amount |
Net Income as per books | 600000 |
Less: | |
Additional Dep under Income Tax | 12000 |
Interest Income on Bond(Exempt) | 45000 |
Repair Expenses under warranty | 11000 |
532000 | |
Add: Estimated Warranty Expenses | 40000 |
Taxable Income | 572000 |
Tax rate | 20% |
Income Tax | 114400 |
Note: Estimated Warranty expenses are charged to Income statement & a liability is created in Balance sheet, when actual warranty expenses are paid, then such warranty expenses are deducted from the liability, whereas under Income Tax, deduction for warranty Expenses are provided on Cash Basis i.e., when it is actually incurred
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