1tryCPA wrote: Question #2: The question asks about DTL at the end of 12/31/93. DTL or DTA are recognized only for future temporarily differences, so we ignore 1992 data. Then, DTL for 12/31/93 should be based on cumulative differences at the year end. 20,000 * 0.40 =8,000. My understanding that the balance at the end of the year for DTL or DTA are based on cumulative differences if they are given. If differences are given by years, then, we need to calculate changes for each year. If in this question, there was only data for 1992 w/out any cumulative differences, you would base your calculations on 9,000 temporarily difference. I usually do JEs for all situations. Helps a lot for me.

In Question #1 you used the $9,000 as the starting point of the calculation to determine the deferred income tax expense in 94'.

In Question #2, I don't understand why you DIDN'T use the cumulative temporary difference amount at the end of 92' ? In fact, you said specifically that you would ignore it. Can you explain ?

First of all, what are trading stamps? These are small paper coupons given to customers by merchants. These stamps have no value individually, but when a customer accumulates a number of them, they can be exchanged with the trading stamp company for merchandise.

Thus, in this question – Dunn Trading Stamp Co. records a liability every year for estimated (contingent) cost of redemption.

IGNORE “Stamp Service Revenue” because we are concerned about the cost of the stamps sold, not the net sales value of stamps sold.

Let us now prepare a T-account:

Stamp redemption liability

Actual cost of redemptions

(for prior to 1989 stamps)    $2,750,000    Balance at Dec.31,1988       $6,000,000

                                                                Estimated cost of redemption

                                                               recorded for 1989 stamps   

                                                                (80% of 2,250,000)              $1,800,000

Balance at Dec.31, 1999

(balancing figure)               $5,050,000   

$5,050,000 is to be reported as liability in BS (Cr.)

note that opening balance of estimated liability gets reduced by actual cost of stamps redeemed and for CY, we only record 80% what can be redeemed for 1989 costs.

Hope this helps....