Mini, Inc., earns pretax book net income of $750,000 in 2018. Mini deducted $20,
ID: 2341466 • Letter: M
Question
Mini, Inc., earns pretax book net income of $750,000 in 2018. Mini deducted $20,000 in bad debt expense for book purposes. This expense is not yet deductible for tax purposes. Mini records $800,000 of pretax book net income in 2019. Mini did not deduct any bad debt expense for book purposes in 2019 but did deduct $15,000 in bad debt expense for tax purposes. Mini records no other temporary or permanent differences. Assuming that the pertinent U.S. tax rate is 21%. a. Enter below the 2019 end-of-year balance in Mini's deferred tax asset and deferred tax liability balance sheet accounts. If an amount is zero, enter "0". If required, round your answers to the nearest dollar.
b. The cost to Mini of the deferral of the bad debt deduction, considering the time value of money. Mini earns an after-tax rate of return on capital of 8%.
$
Explanation / Answer
Computation of Deferred Tax Asseet and Liability balances Deferred Tax Asset 2016= Bad Debt Expense in 2016 X Income Tax $20000*21% Deferred Tax Asset 2016= 4200 Deferred Tax Asset 2017= Bad Debt Expense in 2017 X Income Tax -$15000*21% Deferred Tax Asset 2016= -3150 Deferred Tax Asset Balance= ($4200-$3150)=$1050 Deferred Tax Asset= $1050 Deferred Tax Liability= 0 Cost of Deferred Tax Deduction= Deferred Tax Asset X PVAF @ 8% Cost of Deferred Tax Deduction= ($1050X0.926)=$972.30