TAX-4: Hanks Company The Hanks Company has the following income statement for the year ended December 31, 2016: Subscription revenue Interest revenue on municipal bonds Total revenues $250,000 4,500 254,500 Expenses: Subscription costs Wages Rent expense Depreciation on equipment Insurance expense Total expenses Income before tax 120,000 30,000 15,000 45,000 8.000 218.000 36,500 Hanks Company has the following partially completed comparative balance sheets as of December 31: 2016 2015 $ 92,775 19,250 3,000 2,500 $ 10,000 19,250 2,800 3,200 Assets Cash Tax refund receivable Prepaid rent Prepaid insurance Municipal bonds: Cost and fair value Interest receivable Equipment (net) Deferred tax asset - noncurrent Total assets 50,000 2,250 45,000 ???? ???? 50,000 1,125 90,000 26,825 203,200 Liabilities and Owners' Equity Subscriptions received in advance Wages payable Taxes payable Deferred tax liability-noncurrent Common stock - par value Common stock - capital in excess of par Retained earnings Total liabilities & owners' equity 9,000 7,500 2,400 2,000 ???? 0 ???? 16,350 30,000 30,000 20,000 20,000 ????? 127,350 ???? 203,200 The following additional information about Hanks Company, Inc. is available: 1. Hanks was founded in 1990 and its fiscal and tax years end December 31. 2. Hanks' taxable income for the last three years along with the tax rates for those years is as follows: Year Tax rate Taxable Income (Loss) 2013 .40 35,000 2014 .35 15,000 2015 35 (120.000) 3. The enacted tax rate for 2016 is 0.35 but is 0.30 for 2017 and all years thereafter. This annual schedule of enacted rates has existed for several years. 4. The only equipment owned by Hanks, Inc. was purchased on January 1, 2013 for $225,000. The equipment has an economic life for book and tax purposes of five years and it is expected to have no salvage value at the end of its life. The equipment is depreciated on a straight-line basis for the financial statements. Assume the following percentages are depreciated each year under the tax code (MACRS): 2013-33.33%, 2014-26.67%, 2015-20%, 2016-13.33%, 2017-6.67% (round depreciation to nearest thousand). No equipment was purchased or retired during 2016 5. Taxable income for 2016 before consideration of any net operating loss provisions is $49.400. In 2015. Hanks expected to have taxable income of $50,000 in 2016. They expect to have taxable income of $100,000 in 2017. 6. Prepaid rent and prepaid insurance are current assets while subscriptions received in advance and wages payable are current liabilities. 7. The 12/31/2015 balances in the deferred tax asset and payable accounts are correctly calculated. Required A. Determine the amount of taxes that Hanks Company, Inc. will have to pay for their 2016 tax year. B. Prepare a schedule that determines the amount of deferred tax assets (current and noncurrent) and the amount of deferred tax liabilities (current and noncurrent) as of the end of 2016. C. Calculate the amount of tax expense that Hanks Company, Inc. should show on its income statement for 2016. D. Prepare the journal entry to properly record the tax expense for 2016. E. (Extra Credit) Pretax financial income is shown as $36,500. The tax rate for 2016 is 35%. Why isn't tax expense equal to 35 x 36,500? Explain. Deferred Tax Worksheet Account of Temporary Difference Future Taxable (Deductible) Amount Future Enacted Tax Rate Non-Current Deferred Tax Asset Non-Current Deferred Tax Liability TAX-4: Hanks Company The Hanks Company has the following income statement for the year ended December 31, 2016: Subscription revenue Interest revenue on municipal bonds Total revenues $250,000 4,500 254,500 Expenses: Subscription costs Wages Rent expense Depreciation on equipment Insurance expense Total expenses Income before tax 120,000 30,000 15,000 45,000 8.000 218.000 36,500 Hanks Company has the following partially completed comparative balance sheets as of December 31: 2016 2015 $ 92,775 19,250 3,000 2,500 $ 10,000 19,250 2,800 3,200 Assets Cash Tax refund receivable Prepaid rent Prepaid insurance Municipal bonds: Cost and fair value Interest receivable Equipment (net) Deferred tax asset - noncurrent Total assets 50,000 2,250 45,000 ???? ???? 50,000 1,125 90,000 26,825 203,200 Liabilities and Owners' Equity Subscriptions received in advance Wages payable Taxes payable Deferred tax liability-noncurrent Common stock - par value Common stock - capital in excess of par Retained earnings Total liabilities & owners' equity 9,000 7,500 2,400 2,000 ???? 0 ???? 16,350 30,000 30,000 20,000 20,000 ????? 127,350 ???? 203,200 The following additional information about Hanks Company, Inc. is available: 1. Hanks was founded in 1990 and its fiscal and tax years end December 31. 2. Hanks' taxable income for the last three years along with the tax rates for those years is as follows: Year Tax rate Taxable Income (Loss) 2013 .40 35,000 2014 .35 15,000 2015 35 (120.000) 3. The enacted tax rate for 2016 is 0.35 but is 0.30 for 2017 and all years thereafter. This annual schedule of enacted rates has existed for several years. 4. The only equipment owned by Hanks, Inc. was purchased on January 1, 2013 for $225,000. The equipment has an economic life for book and tax purposes of five years and it is expected to have no salvage value at the end of its life. The equipment is depreciated on a straight-line basis for the financial statements. Assume the following percentages are depreciated each year under the tax code (MACRS): 2013-33.33%, 2014-26.67%, 2015-20%, 2016-13.33%, 2017-6.67% (round depreciation to nearest thousand). No equipment was purchased or retired during 2016 5. Taxable income for 2016 before consideration of any net operating loss provisions is $49.400. In 2015. Hanks expected to have taxable income of $50,000 in 2016. They expect to have taxable income of $100,000 in 2017. 6. Prepaid rent and prepaid insurance are current assets while subscriptions received in advance and wages payable are current liabilities. 7. The 12/31/2015 balances in the deferred tax asset and payable accounts are correctly calculated. Required A. Determine the amount of taxes that Hanks Company, Inc. will have to pay for their 2016 tax year. B. Prepare a schedule that determines the amount of deferred tax assets (current and noncurrent) and the amount of deferred tax liabilities (current and noncurrent) as of the end of 2016. C. Calculate the amount of tax expense that Hanks Company, Inc. should show on its income statement for 2016. D. Prepare the journal entry to properly record the tax expense for 2016. E. (Extra Credit) Pretax financial income is shown as $36,500. The tax rate for 2016 is 35%. Why isn't tax expense equal to 35 x 36,500? Explain. Deferred Tax Worksheet Account of Temporary Difference Future Taxable (Deductible) Amount Future Enacted Tax Rate Non-Current Deferred Tax Asset Non-Current Deferred Tax Liability