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MARBNYC
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Joined: 17 Nov 2009
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Posts: 76

Posted: 19 Nov 2009 at 14:31 \| IP Logged

Question

Lake Corp., a newly organized company, reported pretax financial income of $100,000 for 1990. Among the items reported in Lake's 1990 income statement are the following:

ˇPremium on officer's life insurance with Lake as owner and beneficiary...$15,000 ˇInterest received on municipal bonds...20,000

Lake elected early application of FASB Statement No. 109, Accounting for Income Taxes. The enacted tax rate for 1990 is 30% and 25% thereafter. In its December 31, 1990, balance sheet, Lake should report a deferred income tax liability of:

Answer: $0

I just wanted to confirm even though there is no DTL, there is a DTA of $3,750 (15,000 x ,25) right?

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Marlene

lovethepirk
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Posted: 19 Nov 2009 at 15:08 \| IP Logged

There is no DTA either I don't think...both things are permanent diff's

Financial statement income is $100,00.

It includes these:
There is an expense inside that 100,000 from the premium that cannot be expensed on tax forms. If we remove an expense from the tax form our tax income will increase

There is interest income on the financial statments that you do not have to put on the tax form.

Financial..........100,000
add premium......20,000
deduct interest...(15,000)

federal tax income looks like 105,000 so you would just do the following on
105,000 x .3.
inc tax ex
tax pay

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yahoofan
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Joined: 08 Sep 2009
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Posted: 19 Nov 2009 at 15:24 \| IP Logged

Shouldn't the Taxable income be $95,000? Anyway, I believe the there is no DTA either, as DTA/DTL stems from temporary difference. Non taxable municipal bond interest and non deductible insurance premiums appear on either book only, and therefore should be classfied as permanent difference.

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MARBNYC
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Joined: 17 Nov 2009
Location: United States
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Posted: 19 Nov 2009 at 17:03 \| IP Logged

Okay, here's the tax formula

............TAX RETURN............

Income ........................100

Less: exclusions.............(15)

Gross Income..................95

Less deductions:

Premium expense.............(20) but then the tax guy says NO way Jose! that is not deductible, put it back as Income!

So we start over

............TAX RETURN.........

Income .......................(120)

less: exclusions..............(15)

Gross Income:................105

Less deductions:

None..............................0

Taxable Income...............105

perhaps?

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Marlene

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