Questions -

Q1. During 2012, ABC Company purchased some computer equipment with an estimated life of 5 years for $20,000 with no salvage value. ABC for financial statement purposes depreciates computer equipment using straight line method and uses MACRS for tax purposes and is in the 20% tax bracket. This creates a difference in depreciation of $3,000. ABC erroneously recorded the computers as equipment expense.

Requirement:

A. Make any necessary entries for 2012.

B. Calculate the deferred tax effect due to the difference in depreciating equipment.

Q2. The following information is provided calculate taxable income:

Income before taxes=900,000

Income before taxes includes the following:

Interest income of $80,000 from municipal bonds.

Rental Income collected in advance in 2011 and earned in 2012=$20,000

A piece of equipment was purchased in 2012. Depreciated per books for $40,000 and per income taxes for $100,000.

Warranty expense in 2012 was $200,000 but for tax purposes only $6,000 was deductible.

Assume that at the beginning of 2012 deferred tax asset=$8,000 due to the rental income.

Tax rate for 2012 and foreseeable future is 30%.

Requirement:

A. Calculate taxable income

B. Make the necessary tax entry, including the amounts for tax expense and deferred taxes.

Q3. Assume that last year (2011) ABC had a net operating loss of $50,000 and, ABC reported tax expense for 2012 of $70,000. Also assume that in 2010 ABC had income of $10,000 and a tax rate of 20%. This year, 2012, ABC reported net income of $70,000 and a tax rate of 20%.

Requirements: Prepare the entry that ABC should have made in 2011. Prepare any entry for 2012 recording the effect of the 2011 net operating loss on ABC's books.