Reference no: EM132975673
Question - Part A - ACY Limited ("ACY") started an online retailing business in January 2019. ACY reports a pretax financial income of $270,000 and $360,000 in 2019 and 2020, its first two years of operation.
On January 1, 2019, ACY purchased a truck for delivery of products to customers' residential addresses. The truck has a cost of $300,000, a useful life of 10 years, and no residual value. For financial reporting purpose, ACY adopts the cost model and straight-line depreciation method. For tax purposes, double-declining depreciation method is used.
There is no permanent nor temporary difference from 2019 to 2020, except for the depreciation of the truck. The enacted tax rate is 30%.
Requirement -
A.1 Calculate the depreciation expense for (i) book purpose in 2019 and 2020, respectively and (ii) tax purpose in 2019 and 2020, respectively.
A.2 Discuss whether the difference in the depreciation expense for book and tax purposes will create a deferred tax asset, a deferred tax liability, or neither in 2019? Support your argument with calculations.
A.3 Prepare the journal entries to record income taxes for 2019 and 2020, respectively.
Part B - The following information is available for YCA Limited ("YCA") in 2020, the first year of its operations:
(i) On January 1, 2020, YCA issued a $400,000, 8%, 10-year bond. The bond pays interest annually on December 31 of each year, starting from December 31, 2020. The bond has a yield of 10% and is accounted for under the effective-interest method. Tax deduction for interest expenses is available only to those arising from bank borrowing. Any other interest expenses, including those from the issue of notes and bonds in any circumstances, are not allowed for tax deduction.
(ii) On Nov 1, 2020, YCA accrued a litigation loss of $50,000 for pending litigation with probable unfavourable outcome. YCA expects to deduct this amount for tax purposes when it pays the liability in 2022.
Requirement -
B.1 Prepare the amortization table for the bond in 2020 and 2021. (Round to the nearest dollar.)
B.2 Analyse whether situations (i), and (ii), respectively, will create deferred tax asset, a deferred tax liability, or neither for 2020.
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