I need assistance. i want to make sure im doing it right. thx
Quark Donut Company was incorporated (as a C corporation) and started business in 2007, make and sell donuts. Quark rented space in a local mall with a 8 year operating lease. Quark's only capital expenditure was the purchase in January of 2007 of equipment at a cost of $280,000. This equipment has an economic life of 8 years and 0 expected salvage value. Quark uses straight line depreciation for computation of GAAP net income because this best reflects the true economic depreciation of the equipment. For income tax purposes Quark is permitted to use MACRS (the modified accelerated cost recovery system), and the equipment is considered to be in the 7 year class. Therefore the allowed MACRS rates are: 14.29% the first year, 24.49% the second year, 17.49% the third year, 12.49% the fourth year 8.93% the fifth year, 8.92% in the sixth 8.93% in the seventh year and 4.46% in the 8th year. Depreciation is the only non-cash expense, and is the only source of a difference between taxable income and financial accounting income before tax. Assume an income tax rate of 35% is enacted for the years 2007-2009. During the year 2010 a new income tax rate of 30% was enacted for 2010 to 2014 Projected revenues and operating expenses (excludng taxes and depreciation) are as follows 2007 $150,000 $180,000 $185,000 $190,000 $100,000 $110,000 $113,000 $116,000 eaf 2008 2009 2010 Revenues xpenses eaf Revenues Ex $195,000 $200,000 $200,000 $200,000 $127,000 $132,000 $135,000 S138,000 penses Required I.Use a spreadsheet to find: (note: your spreadsheet is the answer to part I) income taxes paid that year(current income tax payable) deferred tax liability the change in deferred tax liability (equal to deferred income tax expense) total income tax expense net income a. c. d. II. Using the numbers from your spreadsheet hand write the correct journal entry for income taxes for the year 2010 Find the effective tax rate for 2010 and explain why the effective tax rate for 2010 is not 30% Assuming the straight line method yields the true economic depreciation what is the advantages of being able to use MACRS for 111. IV. income tax determinations? Why are tax effects important in deciding whether this is a good investment? DATA 2007 Equipment Purchase Cost YEAR Income Before Taxes Revenue Cash Expenses Revenue cash expenses Straight line ac Income Before Taxes Calculation of Income Tax Payable MACRS Rate Tax Depreciation Taxable Income Income Tax Rate Income Tax Payable Balance Sheet Temporary Difference This Year Accumulated Unreversed T. Difference Deferred Tax Liability Balance Income Statement Current Tax Expense Deferred Taxes Expense Total Income Tax Net Income DATA 2008 2009 2010 2011 2012 2013 2014TOTA DATA DATA DATA DATA -C4-C5 DATA DATA DATA DATA DATA DATA DATA DATA DATA DATA DATA DATA B4-B5 D4-D5 $B1/SD1 D6-D7 E4-E5 SB1/5D1 E6-E7 reciation B6-B7 -C6-C7 DATA DATA DATA DATA DATA DATA DATA DATA SB1 B10 SB1 C10 -C6-C11 DATA -C12 C13 B6-B11 812 B13 -B11-B7 817 B13 DATA DATA DATA DATA DATA DATA DATA Leave Blank -C11-C7 B17 C16 C17 C13 Leave Blank Leave Blank -C14 -C18-B18 -C21+C20 -C8-c22 814 B18 -B21 B20 =B8-B22 As an added hint here is what the solution looks like for the first two years. You of course need to develop the formulas Equipment Purchase Cost YEAR Income Before Taxes Revenue Cash Expenses Revenue cash expenses Straight line accounting depreciation Income Before Taxes Calculation of Income Tax Payable MACRS Rate Tax Depreciation Taxable Income Income Tax Rate Income Tax Payable Balance Sheet Temporary Difference This Year Accumulated Unreversed Difference Deferred Tax Liability Balance Income Statement Current Tax Expense Deferred Taxes Expense Total Income Tax Expense Net Income 280000 Economic Life 2008 2007 $150,000 $180,000 $100,000 $110,000 $50,000 $70,000 $35,000 $35,000 $15,000 $35,000 14.29% 24.49% $40,012 $68,572 $9,988$1,428 35% $3,496 $500 $5,012 $33,572 $5,012 $38,584 $1,754$13,504 $3,496 $500 $1,754$11,750 $5,250$12,250 $9,750$22,750
