Case Study Part A

Scenario

SuperSports Inc.reported pretax financial income of $260,000 for the year 2016. Taxable income of SuperSports is however different from its pretax financial income because of the items given below.

• Depreciation deducted on the tax return is $40,000 greater than the depreciation charged on Income Statement.
• Estimated Warranties Expenses charged to Income Statement is $30,000 but Warranties expenses deductible on tax return are $20,000
• $3,200 appear in the income statement of SuperSports as Fines and penalties paid.
• SuperSports received $ 6,000 interest from Tax Saving Municipal Bonds.

Enacted Tax Rate for the year 2016 is 30% and for 2017 is 35%

Required: For the year 2016, SuperSports Inc. requests you to:

1. Identify items of permanent and temporary difference from the information given
2. What items of temporary difference result in future taxable amounts and what items will result in future deductible amounts
3. Compute Taxable Income
4. Compute current income tax expense/Tax payable
5. Compute deferred taxes ( Deferred Tax Liability and Deferred Tax Asset)
6. Record journal entry for Income Tax Expense
7. Show how deferred taxes will be reported in the Balance Sheet.

A B C D E F G H J K 16 17 3 18 19 Pretax Financial Income Fines and Penalties Income from Tax Exempt securities Excess deprecition deducted on Tax Return Estimated Warranties expenses not deductible in income tax return 20 21 22 23 Taxable income 24 25 4 Tax payable (Taxable income X tax rate for 2016) 26 27 5 Deferred Taxes 28 Deferred Tax Liability (Deferred Tax Asset) 29 30 31 32 33 34 Excess Depreciation charged for tax purposes Estimated Warranties Expenses not deductible on Tax Return Tax Rate 35% 35% 35 Net deferred tax liability 36 37 Case Study Part A Case Study Part B + MT