During year X1, the Nielsen Company reported sales for 2,400 CU and total expenses for 1,800 CU. It has no preexisting deferred tax liability or tax asset. The following information is provided in relation to year X1:
1 Marketable securities held by Nielsen Co. have a market value at the end of the year which exceeds their book value by an amount of eight CU. This potential gain is taxable as pertaining to year X1, but will be reported to shareholders only at the time of the sale.
2 The company accrued interest due on a bank loan for 16 CU. This interest (included in the expenses mentioned) will be tax deductible only when paid (which will be the case in year X2).
3 Nielsen Co. uses an accelerated method of depreciation for certain assets. The depreciation allowance for year X1 for tax purposes exceeds that reported to shareholders (included in the total expenses mentioned above) by 250 CU.
4 During year X1 a fine for an accidental pollution occurrence (included in the total expenses mentioned above) was paid for a total amount of ten CU.
5 Part of the liquidity of Nielsen Co. is invested in tax free municipal bonds. During year X1 these yielded a return of 40 CU (not included in the sales revenue mentioned above).
6 Warranty costs are provisioned at the level of 1.5 percent of sales. The corresponding amount has been included in the total expenses mentioned above. Actual expenses of 15 CU were incurred during year X1 for contractual services and repairs applying to items sold of this and previous periods. Assume the tax rate is 30 percent.
Required
1 Compute the income before income tax for shareholder reporting.
2 Analyze each event with regard to taxation in terms of permanent and timing differences.
3 Compute the income tax payable to the tax authorities and income tax expense for shareholder reporting. (Local GAAP allow that reported tax expense be calculated according to GAAP rules).
4 Record the income tax expense for year X1.