Question
Delta Catfish Company has taken a position in its tax return to claim a tax credit of $160 million (direct reduction in taxes payable) and
Delta Catfish Company has taken a position in its tax return to claim a tax credit of $160 million (direct reduction in taxes payable) and has determined that its sustainability is more likely than not, based on its technical merits. Delta has developed the probability table shown below of all possible material outcomes:
Probability Table ($ in millions) | ||||||||||||||||||||
Amount of the tax benefit that management expects to receive | $ | 160 | $ | 160 | $ | 158 | $ | 146 | $ | 144 | ||||||||||
Percentage likelihood that the tax benefit will be sustained at this level | 10 | % | 20 | % | 25 | % | 20 | % | 25 | % | ||||||||||
Deltas taxable income is $696 million for the year. Its effective tax rate is 25%. The tax credit would be a direct reduction in current taxes payable. Required: 1. At what amount would Delta measure the tax benefit in its income statement? 2. Prepare the appropriate journal entry for Delta to record its income taxes for the year.
Case Development began operations in December 2021. When property is sold on an installment basis, Case recognizes installment income for financial reporting purposes in the year of the sale. For tax purposes, installment income is reported by the installment method. 2021 installment income was $942,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 20222024 are as follows:
2022 | $ | 330,000 | 20 | % |
2023 | 336,000 | 25 | ||
2024 | 276,000 | 25 | ||
Case also had product warranty costs of $403,000 expensed for financial reporting purposes in 2021. For tax purposes, only the $96,000 of warranty costs actually paid in 2021 was deducted. The remaining $307,000 will be deducted for tax purposes when paid over the next three years as follows:
2022 | $ | 115,000 | |
2023 | 100,000 | ||
2024 | 92,000 | ||
Pretax accounting income for 2021 was $1,049,000, which includes interest revenue of $29,000 from municipal bonds. The enacted tax rate for 2021 is 20%. Required: 1. Assuming no differences between accounting income and taxable income other than those described above, prepare the appropriate journal entry to record Cases 2021 income taxes. 2. What is Cases 2021 net income?
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