Question 1 (20 marks) Bill Russell Ltd reports pretax financial income of $90,000 for 2018. The following items cause taxable income to be different than pretax financial income. 1. Excess of tax depreciation over book depreciation by $12,000 2. Provision for warranty is estimated to be $40,000. For tax purpose, the warranty expense is recognized on actual spending of $10,000. 3. Cost for donation & charity of $11,000 were recorded as an expense on the income statement. These costs are not allowed to be recognized as tax deductible items. Bill Russell Ltd's tax rate is 20%. Assume there is no deferred taxes at the beginning of 2018. a) Compute taxable income (show calculation) b) Compute the income taxes payable (show calculation) c) Item 1 will result in which of the following d) Item 2 will result in which of the following e) Item 3 will result in which of the following Increase in DTA Increase in DTA Increase in DTA Increase in DTL Increase in DTL Increase in DTL Decrease in DTA Decrease in DTA O O O O O Decrease in DTA Decrease in DTL Decrease in DTL Decrease in DTL O O No effect No effect No effect f) Compute the income tax expense h) Compute the effective income tax rate for 2018 i) How much will be net income showed in Income Statement for the year 2018 Question 1 (20 marks) Bill Russell Ltd reports pretax financial income of $90,000 for 2018. The following items cause taxable income to be different than pretax financial income. 1. Excess of tax depreciation over book depreciation by $12,000 2. Provision for warranty is estimated to be $40,000. For tax purpose, the warranty expense is recognized on actual spending of $10,000. 3. Cost for donation & charity of $11,000 were recorded as an expense on the income statement. These costs are not allowed to be recognized as tax deductible items. Bill Russell Ltd's tax rate is 20%. Assume there is no deferred taxes at the beginning of 2018. a) Compute taxable income (show calculation) b) Compute the income taxes payable (show calculation) c) Item 1 will result in which of the following d) Item 2 will result in which of the following e) Item 3 will result in which of the following Increase in DTA Increase in DTA Increase in DTA Increase in DTL Increase in DTL Increase in DTL Decrease in DTA Decrease in DTA O O O O O Decrease in DTA Decrease in DTL Decrease in DTL Decrease in DTL O O No effect No effect No effect f) Compute the income tax expense h) Compute the effective income tax rate for 2018 i) How much will be net income showed in Income Statement for the year 2018
