Questions -
Q1. During 2014, P & P Products purchased $20,000 of computer equipment with an estimated life of 5 years and no salvage value. P & P Products uses the straight-line method to depreciate its computer equipment for book purposes and uses MACRS depreciation for tax purposes. This creates a $5,000 difference in depreciation. P & P Products erroneously recorded the computers as equipment expense. P&P Products'92 tax rate is 40%
Required -
a. Make the correcting entry.
b. Calculate the deferred tax effect due to the depreciation of equipment.
Q2. Assume the following for this problem only. In 2012, P & P Products had net income of $10,000. In 2013, P & P Products had a net operating loss of $50,000 and in 2014, P & P Products reported net income of $70,000. Assume a tax rate of 20% for all years presented.
Required -
a. Prepare the entry that P & P Products should have made in 2013.
b. Prepare an entry for the year 2014 to record the effect of the Net Operating Loss from 2013.
Q3. The following information is provided: Income before taxes=$900,000 Income before taxes included the following Interest income of = $80,000 (from municipal bonds) Rental income was collected in advance in 2013 and earned in 2014 = $20,000 Depreciation per books = $40,000 and per income taxes = $100,000. Warranty expense in 2014 was $20,000 but for tax purposed only $5,000 was deductible. Assume that at the beginning of 2014 the deferred tax asset balance= $8,000 due to the rent income. Tax rate for 2014 and the foreseeable future is 40%.
Required -
a. Calculate taxable income
b. Make the necessary tax entry. Be sure to include the amounts for tax expense and deferred taxes.
Q4. Assume that P & P wants to build a new warehouse. The CFO has stated that the building will cost $1.5 million. She has asked you to determine the dollar amount of bonds that P & P would have to issue to cover this cost, assuming that the bonds would have a stated interest rate of 8 percent, a 10-year term and the market rate is currently 6 percent.