Problem 1
Johnson, Inc. accrues a liability on its financial statements for anticipated claims related to faulty widget making. For financial statement purposes, when it accrues this liability the accounting entries are as follows:
Debit Warranty Expense XX
Credit Accrued Warranty Liability XX
When Johnson pays a warranty claim the accounting entries are as follows:
Debit Accrued Warranty Liability XX
Credit Cash XX
Widgets claims a tax deduction when it pays cash for warranty claims. Johnson files a C Corporation tax return as a calendar year taxpayer.
Widgets had the following amounts on its balance sheet for Accrued Warranty Liability on the following calendar-year ends:
12-31-15: $450,000
12-31-16: $700,000
1a. Based solely on a review of the Balance Sheet amounts for Accrued Warranty Liability can we determine the amount of the book-to-tax Schedule M adjustment for Warranty Expense on the Johnson 2016 tax return?
If so, what is the amount of the Schedule M adjustment.
If not, what additional information do we need.
1b. Based solely on a review of the Balance Sheet amounts for Accrued Warranty Liability can we determine the amount of the tax deduction for Warranty Expense on the Johnson 2016 tax return?
If so, what is the amount of the tax deduction.
If not, what additional information do we need.
Problem 2
Assume Lola's, Inc. begins operations in 2016 and is a C Corporation filing a calendar year tax return. Lola's has pre-tax book income of $750,000. In preparing the income tax provision for 2016, Lola's has the following book-to-tax Schedule M adjustments:
Tax Depreciation > Book Depreciation: $125,000
Governmental Penalty Expense: $75,000
Tax-Exempt Interest Income: $25,000
Lola's accrued warranty expense on its 2016 financial statements for potential faulty Lola manufacturing in the amount of $100,000.
Lola's accrued on its 2016 financial statements a bonus of $200,000 to be paid to its sole shareholder. Lola's will pay this bonus on December 15, 2017 only if the sole shareholder remains employed by Lola's.
On its 12-31-16 Balance Sheet does Lola's have a Net Deferred Tax Asset position or a Net Deferred Tax Liability position? Show how you determined your answer.