Problem
ABC Corporation has not adopted ASC 740. Its balance sheet is as follows:
ASSETS: Fixed Assets $800 Total Assets $800
LIABILITIES AND EQUITY:
Note payable $650 Equity $200 Total Liabilities and Equity $800 Assume a tax rate of 25%. Because of accelerated depreciation, the tax basis of the fixed assets is $100. The book basis of the assets is $800, which is also the fair market value. If ABC sells its assets for $800, can it pay off its note payable with its after tax proceeds?
For the Year 1, the following items occurred for ABC Corporation: ABC recorded book income of $50,000. ABC has not recorded any income tax expense. ABC had fines and penalties expenses of $5,000. Assume all fines are imposed by government. Tax depreciation exceeded book depreciation by $8,000. ABC established a warranty reserve of $2,000 during the year. ABC recorded $2,000 of interest income from municipal bonds. ABC's vacation expense accrual decreased by $4,000 during the year. Assume a statutory income tax rate of 25 percent.
What are ABC's permanent book-tax differences? What are ABC's temporary book-tax differences? What is ABC's current tax liability? What is the journal entry to record ABC's current tax liability? What is the journal entry to record ABC's deferred tax provision? What is the total provision for income tax?