Problem 4 (20 points)

Facts:

The following information pertains to Hemsworth Inc.:

• The Allowance for Doubtful Accounts (bad debts) as of December 31, Year 1 was $11,000. During Year 2, uncollectible accounts totaling $5,000 were written off. An expense for bad debts of $15,000 was recognized at the end of Year 2, resulting in a Year 2 ending balance in Allowance for Doubtful Accounts of $21,000.

• At the end of Year 2, there were net unrealized gains on trading securities of $8,000. There were no unrealized gains/losses on trading securities at the beginning of Year 2.

• Hemsworth Inc. uses straight-line depreciation for GAAP and MACRS for income tax purposes. Accumulated depreciation and Year 2 depreciation expense are summarized below:

GAAP Tax

Accumulated Depreciation, end of Year 1 $1,314,000 $2,018,000

Year 2 Depreciation Expense 196,000 259,000

Accumulated Depreciation, end of Year 2 $1,510,000 $2,277,000

• Other miscellaneous book-tax differences are as follows:
  • Non-deductible meals and entertainment expenses $12,000
  • Tax-exempt interest income $15,000

• Ending Year 1 net deferred taxes were equal to a $50,000 net deferred tax liability, comprised of deferred tax assets equal to $100,000 and deferred tax liabilities equal to $150,000.

• Pre-tax accounting income in Year 2 equals $678,000.

• Hemsworths tax rate is 20%.

Required:

2. What is Hemsworths net deferred tax balance on the Year 2 ending balance sheet? (Dont worry about breaking out current/non-current. Just provide the net amount and whether it is a net asset or liability.) (6 points)