Reference no: EM133074544
Case 1 - XYZ Co. at the end of 2018, its first year of operations, prepared a reconciliation between pre-tax financial income and taxable income as follows:
Pre-tax financial income € 750,000
Estimated expenses deductible for taxes when paid 1,200,000
Extra depreciation (1,350,000)
Taxable income € 600,000
Estimated warranty expense of €800,000 will be deductible in 2019, €300,000 in 2020, and €100,000 in 2021. The use of the depreciable assets will result in taxable amounts of €450,000 in each of the next three years.
Required -
1. Prepare a table of future taxable and deductible amounts.
2. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2018, assuming an income tax rate of 40% for all years.
Case 2 - ABC Corp calculated that it had sustained a deferred tax asset of $450,000 in respect of a tax loss and deductible temporary difference of $2.25 million but it had not recognised any such asset in the balance sheet. During the year, a business was injected to the company by the major shareholder and the company began to derive taxable profit to offset with the loss brought forward.
Required -
1. Discuss the implication of the current development on ABC's deferred tax asset.
2. Suggest journal entries to effect the implication in (1).
3. If the tax rate is increased to 30%, discuss and suggest journal entries.