$(($Chap $18,$ Financial Reporting for Taxes$)$

Inverarity, Inc. began $2017$ with the following balances in deferred tax accounts:

Deferred Tax Assets

DTA $-$ Valuation Allowance

Deferred Tax Liabilities

$$70,200(DR)$

$$8,200(CR)$

$$90,000(CR)$

The deferred tax asset resulted from $$150,000$ of unearned rent revenue that was received at the

end of $2016,$ but will be earned for financial reporting purposes evenly across the next three

years $,$ and $2019$Financial Reporting for Taxes$)$

Inverarity, Inc. began $2017$ with the following balances in deferred tax accounts:

Deferred Tax Assets DTA $-$ Valuation Allowance Deferred Tax Liabilities

$$70,200($DR$)$ $$8,200($CR$)$ $$90,000($CR$)$

The deferred tax asset resulted from $$150,000$ of unearned rent revenue that was received at the

end of $2016,$ but will be earned for financial reporting purposes evenly across the next three

years $(2017,2018,$ and $2019)$ and a balance in Estimated Liability Under Warranties of $$84,000.$

The deferred tax liability resulted from the financial accounting bases of depreciable assets

exceeding the tax bases of depreciable assets by $$300,000$ due to excess MACRS $($tax$)$

depreciation over straight$-$line $($financial$)$ depreciation in previous years.

Pre$-$tax book income in $2017$ is $$37,000$ and in $2018$ is $$6,000.$ Income amounts for each year

include non$-$taxable municipal bond interest of $$18,000$ earned$/$received annually in both $2017$

and $2018.$ During $2017$ MACRS depreciation exceeded straight$-$line depreciation by $$20,000.$ In

$2018,$ the timing difference related to depreciation began to reverse in that MACRS depreciation

was $$68,000$ less than straight$-$line depreciation. In $2017,$ Inverarity also recognized $$22,000$

more in warranty expense than the company paid to repair$/$replace deficient products. In contrast,

in $2018,$ Inverarity paid $$36,000$ more to fix$/$replace products returned by customers than they

recognized as warranty expense. In $2017$ and $2018,$ Inverarity paid $$15,000$ in annual premiums

on a life insurance policy for its chief executive officer, which was appropriately recognized as

an expense for financial reporting. In $2018,$ Inverarity also incurred a $$30,000$ fine for an EPA

water$-$quality violation for its scuba$-$diving park, which was appropriately recognized as an

expense for financial reporting.

At the end of $2017,$ management estimated that the DTA $$ Valuation Allowance account should

have a balance of $10\%$ of the Deferred Tax Asset balance. Inverarity management decided that at

the end of $2018,$ the valuation allowance should be $5\%$ of the Deferred Tax Asset balance.

The tax rate was $30\%$ for $2016$ and $2017,$ but during $2017$ Congress changed the applicable tax

rate to $21\%$ for $2018$ and all subsequent years.

Required: Complete information for the $2018$ tax year for Inverarity, Inc. $($continued from

In$-$Class Handout #$2)40$ total points

$($a$)$ Calculate taxable income for $2018.[9$ points$]$

$($b$)$ Calculate the balances in Deferred Tax Asset, Deferred Tax Liabilities, and DTA $-$

Valuation Allowance as of $12/31/18.[11$ points$]$

$($c$)$ Determine Income Tax Expense or Benefit for $2018.[5$ points$]$

$($d$)$ Record the journal entry for income tax recognition for $2018.[12$ points$]$

$($e$)$ Calculate the effective tax rate for $2018.[3$ points$]$