Case $12-7||$ Accounting for Income Taxes: Different Approaches

Mark or Make is a bourbon distillery. Sales have been steady

for the past three years, and operating costs have remained

unchanged. On January $1,2019,$ Mark or Make took advantage

of a special deal to prepay its rent for three years at a substan$-$

tial savings. The amount of the prepayment was $$60,000.$ The

income statement items $($excluding the rent$)$ are shown here.

Assume that the rental is deducted on the corporate tax

purposes in $2019$ and that there are no other temporary differ$-$

ences between taxable income and pretax accounting income.

In addition, there are no permanent differences between tax$-$

able income and pretax accounting income. The corporate tax

rate for all three years is $30\%.$

Required:

a$.$ Construct income statements for $2019,2020,$ and $2021$

under the following approaches to interperiod income tax

allocation:

i$.$ No allocation

ii$.$ Comprehensive allocation

b$.$ Do you believe that no allocation distorts Mark or Make's

net income? Explain.

c$.$ For years $2019$ and $2020,$ Mark or Make reported net income

applying the concept of comprehensive interperiod income

tax allocation. During $2020,$ Congress passed a new tax law

that will increase the corporate tax rate from $30$ to $33\%,$

Reconstruct the income statements for $2020$ and $2019$ under

the following assumptions:

i$.$ Mark or Make uses the deferred method to account for

interperiod income tax allocation.

ii$.$ Mark or Make uses the asset$-$liability approach to

account for interperiod income tax allocation.

d$.$ Which of the two approaches used in question $($a$)$ provides

measures of income and liabilities that are useful to decision

makers? Explain.