DeferredTaxes - Accounting 124 Comprehensive Illustration...

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Accounting 124 Comprehensive Illustration of Accounting for Deferred Income Taxes First Year – 2004 1Turnpike Company, a newly incorporated business, successfully completed its first year of operations on December 31, 2004. Pre-tax financial income for 2004 was $650,000. At the start of 2004, Turnpike acquired $420,000 of depreciable assets. For financial reporting purposes, Turnpike depreciates these assets over a six year useful life. For tax purposes, the assets fall in the 5-year recovery class and Turnpike uses the MACRS system. The depreciation schedules for both financial reporting and tax purposes follow: Depreciation for Difference Year Financial Reporting Tax Purposes Per Year Cumulative 200 4 $ 70,000.00 $ 84,000.00 $(14,000.00) $(14,000.00) 200 5 70,000.00 134,400.00 (64,400.00) (78,400.00) 200 6 70,000.00 80,640.00 (10,640.00) (89,040.00) 200 7 70,000.00 48,384.00 21,616.00 (67,424.00) 200 8 70,000.00 48,384.00 21,616.00 (45,808.00) 200 9 70,000.00 24,192.00 45,808.00 - $ 420,000.00 $420,000.00 $ - $ - Turnpike provides a three year warranty on all products sold. During 2004, Turnpike reported $120,000 as warranty expense on its income statement. Turnpikes actual and estimated warranty costs for 2004, 2005 and 2006 are as follows: Year Warranty Costs 2004 $ 30,000 Actual 2005 40,000 Estimated 2006 50,000 Estimated TOTAL $ 120,000 Acc124 / Deferred Income Taxes / Page 1
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During 2004, Turnpike made $20,000 in contributions to a political action committee. Such costs are not deductible for tax purposes. In addition, Turnpike received $12,000 in interest on municipal bonds. Acc124 / Deferred Income Taxes / Page 2
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The enacted tax rates for 2004 and future years are as follows: Year Enacted Tax Rate 2004 40% 2005 35% 2006 35% 2007 and beyond 30% 1. Taxable Income and Income Taxes Payable – 2004 Pretax Financial Income for 2004 $650,000 Permanent Differences: Non-taxable revenue (municipal bond interest) (12,000) Non-taxable expenses (PAC contributions) 20,000 Temporary Differences: Excess depreciation per tax
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This note was uploaded on 04/10/2008 for the course ACT 123 taught by Professor Venuti during the Fall '07 term at Hofstra University.

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DeferredTaxes - Accounting 124 Comprehensive Illustration...

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