1. A company’s net income before taxes is $400. Included in net income is $20 of tax-exempt interest revenue from an investment in municipal bonds. The statutory tax rate is 25%. There are no other book-tax differences.

• Calculate taxable income, income taxes payable, income tax expense, and the effective tax rate for the company.
• For future review: Could you calculate net income before taxes if you were given taxable income and information about a permanent difference?

2. On December 15, Year 1, a company received a check in the amount of $200 as payment in advance for rent of storage space for Years 2 and 3 ($100 per year). The statutory tax rate is 25% for all three years.

• What is the amount of the temporary difference at the end of each Year (Years 1, 2, and 3)?
• Does this difference result in a deferred tax asset or liability?
• What is the balance in the deferred tax account at the end of each year?
• How would your answer change if the statutory tax rate was 25% for years 1 and 2 and 20% for year 3?

Other topics to review: net operating losses, uncertain tax positions