Tax Expense/Deferred Taxes Problem

Wanda Wallaces Wetsuit Warehouse is located in Winnebago, Wisconsin. The company manufactures wetsuits for diving, surfing, and paddling use. The companys products include full wetsuits, Farmer Johns, and shorties. The company also has a line of neoprene booties and gloves.

The companys tax returns and financial statements included the following information:

Year ended:	2016	2017	2018	2019	2020
Taxable income	$625,000	$646,000	$667,000	$651,000	$843,000
As of:	12/31/2016	12/31/2017	12/31/2018	12/31/2019	12/31/2020
NBV of Property, Plant & Equipment	$1,234,000	$1,175,000	$1,115,000	$1,020,000	$1,289,000
Tax basis of Property, Plant & Equipment	$890,000	$815,000	$767,000	$808,000	$997,000
Prepaid Insurance	$47,000	$39,000	$41,000	$51,000	$44,000
Deferred/Unearned Revenue	$18,000	$16,000	$10,000	$13,000	$83,000
Warranty Liability	$12,000	$15,000	$13,000	$8,000	$11,000

Other information:

Amounts paid for prepaid insurance are deductible when paid.

Amounts received as deferred/unearned revenue are included in taxable income when received.

Warranties expenditures are deductible when paid.

As of January 1, 2016, the company had no deferred tax assets or liabilities.

The companys effective Federal income tax rate before 2018 was 30%. Wisconsin corporate income taxes total 7.9% of taxable income. The total effective tax rate the company paid before 2018 was therefore 37.9%.

In December, 2017 the Tax Cuts and Jobs Act was enacted by the Federal government, which lowered the corporate tax rate to 21% beginning in 2018. Combined with the Wisconsin corporate tax, the companys effective tax rate for 2018 and later years was 28.9%.

Required:

a. For each of the balance sheet items listed above, indicate whether the temporary differences relate to a deferred tax asset of deferred tax liability. Fully explain.

b. Compute the companys tax expense for each year.