ACC440 External Financial Reporting II Chapter 19 Accounting for Income Taxes Offline Homework Assignment Spring, 2021 The McGuire Company manufactures and sells stamping machines used to produce body panels for automobiles. In 20X1, the company reported pretax GAAP income of $7,250,000. Included in this amount was municipal bond interest of $27,000. McGuire insured the lives of key executives at a cost of $17,000 and paid non-deductible fines of $52,000.

The company depreciates assets for GAAP and tax purposes as follows:

Book Tax Difference

20X1 1,400,000 2,840,000 (1,440,000)

20X2 1,400,000 2,510,000 (1,110,000)

20X3 1,400,000 2,240,000 (840,000)

20X4 1,400,000 1,970,000 (570,000)

20X5 1,400,000 1,680,000 (280,000)

20X6 1,400,000 1,420,000 (20,000)

20X7 1,400,000 1,180,000 220,000

20X8 1,400,000 920,000 480,000

20X9 1,400,000 720,000 680,000

20X10 1,400,000 688,000 712,000

20X11 1,400,000 540,000 860,000

20X12 1,400,000 540,000 860,000

20X13 1,400,000 -(no tax entry) 1,400,000

20X14 1,400,000 -(no tax entry) 1,400,000

McGuire warrants its products against defects for three years. The company recognized $640,000 of warranty expense for financial reporting purposes and incurred $224,000 of costs providing warranty services in 20X1.

It expects to incur costs of $280,000 and $320,000 in 20X2 and 20X3 respectively to provide warranty related services. McGuire offers installment payment plans to its customers allowing them to pay for purchases evenly over a four-year period with the first payment due in the current year. In 20X1, the company reported gross profit related to installment sales of $7,800,000 on its GAAP income statement. One fourth of the related sales were collected in 20X1, with the remaining sales to be collected evenly in 20X2, 20X3, and 20X4. In 20X1, McGuire received $800,000 for the rental of a warehouse it owns. The payment was for 20X1 and 20X2.

McGuire incurred an operating loss for tax purposes of $755,400 in 20X0. A deferred tax asset NOL was recorded with an anticipated future tax rate of 21%. The companys management uses NOL carryforwards as early as possible. McGuire reported a Deferred Tax Asset of $979,370 and a Deferred Tax Liability of $3,144,520 on its 20X0 balance sheet.

Enacted tax rates are as follows: 20X1 and 20X2 21%, 20X3 and beyond 28%. In 20X2, McGuire had pretax GAAP income of $10,112,346 that included municipal bond interest of $31,500. The company paid fines of $103,420 and insured the lives of key personnel at a cost of ACC440 External Financial Reporting II Chapter 19 Accounting for Income Taxes Offline Homework Assignment Spring, 2021 $17,000. Sadly, one of the insured individuals lost their life in an auto accident. As a result, the company received a death benefit of $2,000,000. McGuire continued to warrant its products against defects and recognized $912,000 of warranty expense for GAAP purposes and incurred actual costs of $412,600. As of December 31, 20X2, the company expected to incur repair costs of $440,000 and $520,000 in 20X3 and 20X4 respectively for all remaining warranty obligations. In 20X2, McGuire again sold products on installment and reported gross profit of $9,200,000 for these items for financial purposes. One fourth of the related receivables were collected in 20X2 with the remaining receivables expected to be collected evenly in 20X3, 20X4, and 20X5. Note: receivables for 20X1 installment sales were collected in 20X2 as expected, with remaining receivables to be collected in 20X3 and 20X4 as originally projected. McGuire did not enter into any new rental arrangements in 20X2 and did not place any new long-term assets into service. Required: 1. Prepare Step 1 and Step 2 schedules for 20X1 and 20X2. 2. Prepare required journal entries for current and deferred income taxes for 20X1 and 20X2. 3. Prepare any required journal entries related to NOL carryforward provisions for 20X1 and 20X2. 4. Indicate the following amounts reported for 20X1 and 20X2: a. Income tax expense reported on the income statement (current, deferred, and total) b. Net deferred tax asset or liability reported on the balance sheet c. Deferred tax asset NOL reported on the balance sheet Your solution should be prepared in good form in Excel with proper formatting