Question # 4 (31 marks)

As a tax consultant, you receive tax forms and financial reports from various companies. Following are independent cases in which you have to check the given numbers in bold and decide whether it is correct or not. If it is wrong, then you have to provide

(a) the correct answer with detailed calculations and (b) explanations of your answers including the appropriate accounting treatment of the various transactions.

A. National Tourism Company reported on 31 December, 2018 a pretax financial income of $900,000 which is subject to 40% tax rate. At the beginning of that year, the company had a deferred tax liability of $18,000 and a deferred tax asset of $12,000. During the year, National recorded warranty costs of $156,000 to be paid in 2019 and prepaid advertising expense that will be used in 2019 of $36,000. Also, the company in 2018 received an interest on governmental bonds of $72,000. National reported $114,000 operating losses carryforward and $78,000 of installment sales revenue to be collected in 2019. At December 31, 2018, the companys accountant reported a taxable income of $714,000 on its tax return. Also, he decreased deferred tax asset by $64,800 and reported deferred tax liability of $31,200. Do you agree with the reported numbers? (11 marks)

B. ZMAN Company reported a taxable income of $400,000 for 2019. The cumulative taxable temporary differences on 1/1/2019 were $225,000 and on 31/12/2019 were $160,000. The tax rate is 40% for 2019 and 30% for future years. Based on the above information, the companys accountant reported a pretax financial income of $560,000. Do you agree with the reported numbers? (4 marks)

C. Smith is an accountant in South Company. He reported a pretax financial income of $2,800,000, current tax of $1,001,000 and deferred tax of $168,000 in the income statement at year ended December 31, 2019. In order for you to check the given number, you have obtained the following information:

i. Nontaxable dividends of $ 120,000 was received during 2019.

ii. On January 3, 2018, the company purchased machinery for $2,400,000. It is depreciated using straight-line method over 8 years for financial reporting purposes and over 5 years for tax purposes. The company is allowed to report half of the depreciation expense amount in the first year and the other half in 2023 for tax purposes.

iii. Tax rate is 35% for all years. South Company wants to use the above information to (1) check the given tax numbers, (2) provide necessary entry to record income taxes for 2019 and (3) show how the recorded accounts are presented on 2019 income statement. (16 marks)