Question

Nelson Inc. purchased machinery at the beginning of 2014 for $90,000. Management used the straight-line method to depreciate the cost for financial reporting purposes and the sum-of-the-years-digits method to depreciate the cost for tax purposes. The life of the machinery was estimated to be three years, and the salvage value was estimated at zero. Revenues less expenses other than depreciation expense and goodwill impairment equaled $500,000 for 2014, 2015, and 2016. Nelson pays income tax at the rate of 20% of taxable income. The goodwill impairment equaled $50,000 for 2014 and 2015. There was no impairment in 2016.

Required:
1. Compute Nelson’s taxable income and financial reporting income (before tax) for all three years.
2. What are permanent and temporary differences? Give an example of each for Nelson.
3. For 2014, 2015, and 2016, determine Nelson’s income tax payable at December 31, income tax expense for the year, and deferred tax asset or liability at December 31. For the last item, be sure to specify whether the item is a deferred tax asset or liability.
4. Assume the federal government changes the tax rate to 30% at the beginning of 2015.
Compute the following:
Income tax payable for 2015
Income tax expense for 2015



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  • CreatedSeptember 10, 2014
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