Homework #6 (Due September 21" 11:59PM) Deferred Taxes. Assume that Firm ABC has revenues of $120,000 for both 2017 and 2018. It also has operating expenses of $40,000 for each of these years. In addition, Firm ABC accrues a loss and related liability of $10,000 for financial reporting purposes because of pending litigation. Firm ABC cannot deduct this amount for tax purposes until it pays the liability, expected in 2018. As a result, a deductible amount will occur in 2018 when Firm ABC settles the liability, causing taxable income to be lower than pretax financial information 2017 2018 Revenues 120,000 120,000 Expenses 40,000 40,000 Litigation loss 10,000 Pretax financial income 70,000 80,000 Income tax expense (40%) 28,000 32,000 2017 120,000 40,000 Revenues Expenses Litigation loss Taxable income Income tax payable (40%) 2018 120,000 40,000 10,000 70,000 28,000 80,000 32,000 Journalize the entry at 12/31/2017 to record income tax expense, deferred tax asset, and income taxes payable. (10 pt) Journalize the entry at 12/31/2018 to record income tax expense, deferred tax asset, and income taxes payable. (10 pt) Stock Option On 1/1/2020, the stockholders of Firm ABC approve a plan that grants the company's CEO options to purchase 5,000 shares each of the company's zero par value common stock The company grants the options on January 1, 2020. The executives may exercise the options after 1/1/2022. The exercise price per share is $10, and the market price of the stock at the date of grant is $10 per share. The company computes total compensation expense by applying an acceptable fair value option-pricing model (such as the Black-Scholes option-pricing model). To keep this illustration simple, we assume that the fair value option-pricing model determines the executive's total compensation expense to be $10,000. Corporate tax rate is 20%. Income Tax Expense for 2020 and 2021 is $50,000, and Income Taxes Payble for 2020 and 2021 is $51,000. Prepare journal entries on 12/31/2020 and 12/31/2021. (15 pt) Suppose that the CEO exercises options on 1/1/2022 to purchase 5,000 shares and the market price of the stock is $20 per share. Prepare the journal entries (15 pt): What is the realized value loss (pre-tax) to the current shareholders? (15 pt) Prepare the journal entries related to tax return (10 pt): Deferred to and fabilities are recognized for the future comes of differences between the carrying amo and liabilities and their respective tas hases wing eacted txt rates in effect for the year in which the differences are expected to be reverunt Significant deferred texts and liabilities comit of the following in the 5 Deferred to Net pasting loss and credit Accruals and allows Stock-based compen Nel undir losses Net deferred tatt Valuation allowance 120907 J87.100 211250 10.07 7244 (66.746) 655638 319.368 142.100 675.0 Can you estimate EBAY's after-tax stock-based compensation expense that is "hidden" for the year ended December 31, 2010? Assume the tax rate of 36.3% (15 pt)
