Minl, Inc, earns pretax book net income of $1,048,000 in 2016. Mini déducted $19
ID: 2599721 • Letter: M
Question
Minl, Inc, earns pretax book net income of $1,048,000 in 2016. Mini déducted $191,600 in bad debt expense for book purposes. This expense is not yet deductible for tax purposes. Mini reports $1,100,400 of pretax book net income in 2017. Mini did not deduct any bad debt expense for book purposes in 2017 but did deduct $143,700 in bad debt expense for tax purposes. Mini has no other temporary or permanent differences. The applicable U.S. tax rate is 35%, and Mini earns an after-tax rate of return on capital of 8%. Enter below the 2017 end-of-year balance in Mini's deferred tax asset and deferred tax liability balance sheet accounts If an amount is zero, enter "o" 2017 a. Deferred tax asset account balance b. Deferred tax liability account balance In time value of money terms, what has been the cost to Mini of the deferred tax deduction for bad debts? The present value factor at 8% is 0.9259Explanation / Answer
In 2016, Mini Inc had deducted $191,600 in the books of accounts as bad debts which was not deducted in the tax books. Assuming this is a temporary difference and can be claimed over the period of years in the tax books, this would give rise to a deffered tax asset. The tax liability has reduced in the subsequent year since the decution was not availed. The deferred tax asset equals the tax benefit of the temporary difference i.e. 35% on $191,600 = $ 67,060.
In 2017, Mini Inc had deducted $143,700 in the tax books as bad debts which was not deducted in the books of accounts. This in turn gave rise to a deferred tax liability since there could be a potential liability that needs to be accrued in the books of accounts as it was not deducted . The deferred tax liability equals the tax benefit of the temporary difference i.e. 35% on $143,700 = $ 50,295.
Hence , net Deferred tax asset in 2017 = 67,060 -50,295 = $16,765 .
The present value of the deferred tax deduction would be 16,765*0.9259 = $15,222.71