Simply Syrup Incorporated, a maple syrup maker, reported the following events causing differences between pretax accounting income and taxable income during its first full year of operations:
i. I n 2013, Simply Syrup purchased equipment costing $ 440,000 (with a useful life of four years and no salvage value) that it will depreciate on a straight- line basis for financial reporting purposes. Simply Syrup will use an accelerated method for tax purposes and depreciate $ 200,000 in the first year and $ 80,000 in the following three years (i. e., 2014 through 2016).
ii. On December 31, 2013, Simply Syrup collected $ 70,000 for future delivery of 3,500 cases of its Maple Light Syrup. It is scheduled to deliver 2,100 cases in 2014 and the remainder in 2015. iii. Simply Syrup invests in U. S. government securities to earn tax- free interest. In 2013, the company reported $ 8,000 of interest income from this investment on its income statement.
iv. Simply Syrup makes a promise to its customers: “We will give you a full refund if you are hospitalized after eating our syrup on your pancakes.” Based on past experience, the company estimates that this warranty will cost them 10% of their sales. Sales of syrup in 2013 amounted to $ 100,000 and the firm recorded an accrued warranty expense of $ 10,000. The warranties expire in one year.
v. I n 2013, Simply Syrup insured the life of its president, Hill L. Minimon. The premiums paid amounted to $ 5,000. The company is the beneficiary.
Simply Syrup has a 40% tax rate and reported income before tax of $ 500,000 under GAAP for 2013.
Required
a. Compute income tax payable in 2013.
b. Determine the deferred tax asset and liability at end of 2013.
c. Determine income tax expense for 2013 and prepare the journal entry or entries necessary to record the tax provision for the year. Record deferred tax assets and deferred tax liabilities separately.
d. Classify the net deferred tax asset or deferred tax liability on the 2013 balance sheet as current or noncurrent. Justify the classification used.
e. Compute the 2013 effective tax rate and reconcile it to the statutory federal rate of 40% in both percent-ages and dollars.
f. Prepare the entry necessary in 2013 based on your obtaining information that Simply Syrup will not realize one- half of the deferred tax asset over the reversal period. g. Assume the 2015 Congress enacts a new law on January 1, 2015, reducing the tax rate to 36% effective January 1, 2015. Assume also that there are no further warranty accruals and no warranty claims in 2014. Prepare the journal entry necessary on January 1, 2015, to reflect this tax rate change. Record any deferred tax assets and deferred tax liabilities separately and ignore any allowance account for a deferred tax asset. Assume planned reversals of deferred accounts were recorded in 2014.