Quark Donut Company was incorporated (as a C corporation) and started business in 2007, make and...
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Quark Donut Company was incorporated (as a C corporation) and started business in 2007, make and sell donuts. Quark rented space in a local mall with a 8 year operating lease. Quark's only capital expenditure was the purchase in January of 2007 of equipment at a cost of $280,000. This equipment has an economic life of 8 years and 0 expected salvage value. Quark uses straight line depreciation for computation of GAAP net income because this best reflects the true economic depreciation of the equipment. For income tax purposes Quark is permitted to use MACRS (the modified accelerated cost recovery system), and the equipment is considered to be in the 7 year class. Therefore the allowed MACRS rates are: 14.29% the first year, 24.49% the second year, 17.49% the third year, 12.49% the fourth year 8.93% the fifth year, 8.92% in the sixth 8.93% in the seventh year and 4.46% in the 8th year. Depreciation is the only non-cash expense, and is the only source of a difference between taxable income and financial accounting income before tax. Assume an income tax rate of 35% is enacted for the years 2007-2009. During the year 2010 a new income tax rate of 30% was enacted for 2010 to 2014. Projected revenues and operating expenses (excluding taxes and depreciation) are as follows: Year Revenues Expenses Year Revenues Expenses II. III. IV. a. b. 2007 $150,000 $100,000 Required: I. Use a spreadsheet to find: (note: your spreadsheet is the answer to part I) income taxes paid that year(current income tax payable) deferred tax liability C. d. 2008 2009 $180,000 $185,000 $110,000 $113,000 2011 2012 2013 $195,000 $200,000 $200,000 $127,000 $132,000 $135,000 2010 $190,000 $116,000 2014 $200,000 $138,000 the change in deferred tax liability (equal to deferred income tax expense) total income tax expense, net income Using the numbers from your spreadsheet hand write the correct journal entry for income taxes for the year 2010. Find the effective tax rate for 2010 and explain why the effective tax rate for 2010 is not 30% Assuming the straight line method yields the true economic depreciation what is the advantages of being able to use MACRS for income tax determinations? Why are tax effects important in deciding whether this is a good investment? Equipment Purchase Cost YEAR Income Before Taxes Revenue Cash Expenses Revenue - cash expenses Straight line accounting depreciation Income Before Taxes Calculation of Income Tax Payable MACRS Rate Tax Depreciation Taxable Income Income Tax Rate Income Tax Payable Balance Sheet Temporary Difference This Year Accumulated Unreversed T. Difference Deferred Tax Liability Balance Income Statement Current Tax Expense Deferred Taxes Expense Total Income Tax Expense Net Income DATA 2007 DATA DATA =B4-B5 =$B1/$D1 -86-87 DATA =$B1 B10 =B6-B11 DATA =B12*B13 =B11-87 =B16 =B17 B13 =B14 =B18 =B21+B20 =B8-B22 Economic Life 2008 DATA DATA =C4-C5 =$B1/$D1 =C6-C7 DATA =$B1 C10 =C6-C11 DATA =C12*C13 =C11-C7 =B17+C16 =C17°C13 =C14 =C18-B18 =C21+C20 =C8-C22 DATA 2009 DATA DATA =D4-D5 =$B1/SD1 =D6-D7 DATA DATA 2010 DATA DATA =E4-E5 =$B1/$D1 =E6-E7 DATA DATA 2011 DATA DATA DATA DATA DATA DATA 2012 DATA DATA DATA DATA DATA DATA 2013 DATA DATA DATA DATA 2014 TOTAL Leave Blank Leave Blank Leave Blank As an added hint here is what the solution looks like for the first two years. You of course need to develop the formulas. Equipment Purchase Cost YEAR 280000 Economic Life 2007 2008 Income Before Taxes Revenue Cash Expenses Revenue - cash expenses Straight line accounting depreciation Income Before Taxes Calculation of Income Tax Payable MACRS Rate Tax Depreciation Taxable Income Income Tax Rate Income Tax Payable Balance Sheet Temporary Difference This Year Accumulated Unreversed T. Difference Deferred Tax Liability Balance Income Statement Current Tax Expense Deferred Taxes Expense Total Income Tax Expense Net Income $150,000 $180,000 $100,000 $110,000 $50,000 $70,000 $35,000 $35,000 $15,000 $35,000 14.29% 24.49% $40,012 $68,572 $9,988 $1,428 35% $3,496 35% $500 $5,012 $33,572 $5,012 $38,584 $1,754 $13,504 $3,496 $500 $1,754 $11,750 $5,250 $12,250 $9,750 $22,750 Quark Donut Company was incorporated (as a C corporation) and started business in 2007, make and sell donuts. Quark rented space in a local mall with a 8 year operating lease. Quark's only capital expenditure was the purchase in January of 2007 of equipment at a cost of $280,000. This equipment has an economic life of 8 years and 0 expected salvage value. Quark uses straight line depreciation for computation of GAAP net income because this best reflects the true economic depreciation of the equipment. For income tax purposes Quark is permitted to use MACRS (the modified accelerated cost recovery system), and the equipment is considered to be in the 7 year class. Therefore the allowed MACRS rates are: 14.29% the first year, 24.49% the second year, 17.49% the third year, 12.49% the fourth year 8.93% the fifth year, 8.92% in the sixth 8.93% in the seventh year and 4.46% in the 8th year. Depreciation is the only non-cash expense, and is the only source of a difference between taxable income and financial accounting income before tax. Assume an income tax rate of 35% is enacted for the years 2007-2009. During the year 2010 a new income tax rate of 30% was enacted for 2010 to 2014. Projected revenues and operating expenses (excluding taxes and depreciation) are as follows: Year Revenues Expenses Year Revenues Expenses II. III. IV. a. b. 2007 $150,000 $100,000 Required: I. Use a spreadsheet to find: (note: your spreadsheet is the answer to part I) income taxes paid that year(current income tax payable) deferred tax liability C. d. 2008 2009 $180,000 $185,000 $110,000 $113,000 2011 2012 2013 $195,000 $200,000 $200,000 $127,000 $132,000 $135,000 2010 $190,000 $116,000 2014 $200,000 $138,000 the change in deferred tax liability (equal to deferred income tax expense) total income tax expense, net income Using the numbers from your spreadsheet hand write the correct journal entry for income taxes for the year 2010. Find the effective tax rate for 2010 and explain why the effective tax rate for 2010 is not 30% Assuming the straight line method yields the true economic depreciation what is the advantages of being able to use MACRS for income tax determinations? Why are tax effects important in deciding whether this is a good investment? Equipment Purchase Cost YEAR Income Before Taxes Revenue Cash Expenses Revenue - cash expenses Straight line accounting depreciation Income Before Taxes Calculation of Income Tax Payable MACRS Rate Tax Depreciation Taxable Income Income Tax Rate Income Tax Payable Balance Sheet Temporary Difference This Year Accumulated Unreversed T. Difference Deferred Tax Liability Balance Income Statement Current Tax Expense Deferred Taxes Expense Total Income Tax Expense Net Income DATA 2007 DATA DATA =B4-B5 =$B1/$D1 -86-87 DATA =$B1 B10 =B6-B11 DATA =B12*B13 =B11-87 =B16 =B17 B13 =B14 =B18 =B21+B20 =B8-B22 Economic Life 2008 DATA DATA =C4-C5 =$B1/$D1 =C6-C7 DATA =$B1 C10 =C6-C11 DATA =C12*C13 =C11-C7 =B17+C16 =C17°C13 =C14 =C18-B18 =C21+C20 =C8-C22 DATA 2009 DATA DATA =D4-D5 =$B1/SD1 =D6-D7 DATA DATA 2010 DATA DATA =E4-E5 =$B1/$D1 =E6-E7 DATA DATA 2011 DATA DATA DATA DATA DATA DATA 2012 DATA DATA DATA DATA DATA DATA 2013 DATA DATA DATA DATA 2014 TOTAL Leave Blank Leave Blank Leave Blank As an added hint here is what the solution looks like for the first two years. You of course need to develop the formulas. Equipment Purchase Cost YEAR 280000 Economic Life 2007 2008 Income Before Taxes Revenue Cash Expenses Revenue - cash expenses Straight line accounting depreciation Income Before Taxes Calculation of Income Tax Payable MACRS Rate Tax Depreciation Taxable Income Income Tax Rate Income Tax Payable Balance Sheet Temporary Difference This Year Accumulated Unreversed T. Difference Deferred Tax Liability Balance Income Statement Current Tax Expense Deferred Taxes Expense Total Income Tax Expense Net Income $150,000 $180,000 $100,000 $110,000 $50,000 $70,000 $35,000 $35,000 $15,000 $35,000 14.29% 24.49% $40,012 $68,572 $9,988 $1,428 35% $3,496 35% $500 $5,012 $33,572 $5,012 $38,584 $1,754 $13,504 $3,496 $500 $1,754 $11,750 $5,250 $12,250 $9,750 $22,750
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Related Book For
Fundamentals of Cost Accounting
ISBN: 978-0077398194
3rd Edition
Authors: William Lanen, Shannon Anderson, Michael Maher
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