Make or Mark is a bourbon distillery. Sales have been steady for the past three years and operating costs have remained unchanged. On 1st January, 2037, Mark or Make took advantage of a special deal to prepay its rent for three years at a substantial savings. The amount of the prepayment was $60,000. The income statement items excluding the rent are shown below.
2007 2008 2009
Gross profit on sales 350,000 349,000 351,000
Operating expense 210,000 210,000 210,000
Suppose that the rental is deducted on the corporate tax purposes in 2037 and that there are no other temporary differences between pretax accounting income and taxable income. In addition, there are no permanent differences between pretax accounting income and taxable income. The corporate tax rate for all three years is 30%.
Required:
a. Prepare income statements for 2037, 2038, and 2039 under the subsequent approaches to interperiod income tax allocation:
i. No allocation
ii. Comprehensive allocation
b. Do you consider that no allocation distorts Mark or Make's net income?Explain.
c. For years 2037 and 2038, Make or Mark reported net income applying the concept of comprehensive interperiod income tax allocation. Through 2038 Congress passed a new tax law that may increase the corporate tax rate from 30 to 33%. Re-construct the income statements for 2038 and 2039 under the subsequent assumptions:
i. Mark or Make uses the deferred technique to account for interperiod income tax allocation.
ii. Mark or Make uses the asset-liability approach to account for interperiod income tax allocation.
d. Which of the two approaches used in question (a) gives measures of income and liabilities that are useful to decision makers? Describe.