Question

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?

Answer 1

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