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SuperSports Inc.reported pretax financial income of $260,000 for the year 2016. Taxable income of SuperSports is however different from its pretax financial income because of the items given below....

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SuperSports Inc.reported pretax financial income of $260,000 for the year 2016. Taxable income of SuperSports is however different from its pretax financial income because of the items given below.

  • Depreciation deducted on the tax return is $40,000 greater than the depreciation charged on Income Statement.
  • Estimated Warranties Expenses charged to Income Statement is $30,000 but Warranties expenses deductible on tax return are $20,000
  • $3,200 appear in the income statement of SuperSports as Fines and penalties paid.
  • SuperSports received $ 6,000 interest from Tax Saving Municipal Bonds.

Enacted Tax Rate for the year 2016 is 30% and for 2017 is 35%

Required: For the year 2016, SuperSports Inc. requests you to:

  1. Identify items of permanent and temporary difference from the information given
  2. What items of temporary difference result in future taxable amounts and what items will result in future deductible amounts
  3. Compute Taxable Income
  4. Compute current income tax expense/Tax payable
  5. Compute deferred taxes ( Deferred Tax Liability and Deferred Tax Asset)
  6. Record journal entry for Income Tax Expense
  7. Show how deferred taxes will be reported in the Balance Sheet.

Case Study Part B

SuperSports provides you the following pension data for the year 2016.

Item

Service Cost, 2016

$248,000

Projected Benefit Obligation, January 2016

$340,000

Plan assets (fair value), Januray 1, 2016

$360,000

Prior Service Cost - AOCI (2016 amoritization, $25,000)

$250,000

Net Loss - AOCI (2016 amoritization, $10,000)

$110,000

Actual Return on Plan Assets

$45,000

Interest rate and expected return on plan assets

10%

Contributions made to plan assets during 2016

$175,000

SuperSports requests you to:

  1. Compute pension expense for the year 2016
  2. Record 2016 journal entry for pension expense
Answered Same DayDec 26, 2021

Solution

Robert answered on Dec 26 2021
87 Votes
Case Study Part A
1. Identify items of permanent and temporary difference from the information given
The accounting profit of a company differs from its taxable profit primarily due to timing/
temporary or permanent differences. These differences arise mainly due to allowance and
disallowance of certain incomes and expenses by the income tax authorities for the purpose of
calculation of taxable income.
Permanent differences are such business transactions which are recognized in the financial
statements but shall not ever be allowed/ deductible under income tax returns. Thus, the
following are the permanent differences in Super Sports Inc for FY 2016:
1. Fines and penalties paid for $3,200 as the same are not allowed as deductible expenses
for taxation purposes.
2. Interest from Tax Saving Municipal Bonds of $ 6,000 as they come under the purview of
exempted incomes
Similarly, temporary or timing differences are those business income or expense which are
ecognized in financial statements of a certain period but are allowable in different periods for
the purpose of tax. Thus, the following are the temporary differences in Super Sports Inc for FY
2016:...
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