Farmer Co. purchased a sowing machine on January 1, 2013. Forits sowing machines, Farmer Co. uses straight-line depreciation forfinancial reporting purposes (US GAAP) and accelerated depreciationfor tax purposes. The book value of the newly purchased sowingmachine is $1,500. Its useful life is 3 years. Assume income beforedepreciation is $1,000 in 2013, $900 in 2014, and $1100 in 2015,respectively. Farmer Co. has a 30% income tax rate for all years.The depreciation table is as follows:
2013
2014
2015
Straight-Line Depreciation
$500
$500
$500
Accelerated Depreciation
$850
$450
$200
a. Fill out the excerpted income statements under US GAAP rulesand tax rules for the years 2013 and 2014. The income statementformat to complete is:
Income before depreciation
Depreciation
Income before tax
Income tax
b. Use the financial statement template to indicate the effectsof income taxes on the companyâs financial statements. Assume thecompany pays cash for its taxes as they are due. (There will be twotransactions listed in the financial statement effects template:"Record tax expense for 2013" and "Record tax expense for2014.")
c. The footnote of the 2013 annual report of Farmer Co.disclosed a valuation allowance of $487 related to various deferredtax assets. The 2012 valuation allowance had a balance of $323.
Why did Farmer Co. report the valuation allowance?
Can the valuation allowance be manipulated by managers? Why?
Farmer Co. purchased a sowing machine on January 1, 2013. Forits sowing machines, Farmer Co. uses straight-line depreciation forfinancial reporting purposes (US GAAP) and accelerated depreciationfor tax purposes. The book value of the newly purchased sowingmachine is $1,500. Its useful life is 3 years. Assume income beforedepreciation is $1,000 in 2013, $900 in 2014, and $1100 in 2015,respectively. Farmer Co. has a 30% income tax rate for all years.The depreciation table is as follows:
2013 | 2014 | 2015 | |
Straight-Line Depreciation | $500 | $500 | $500 |
Accelerated Depreciation | $850 | $450 | $200 |
a. Fill out the excerpted income statements under US GAAP rulesand tax rules for the years 2013 and 2014. The income statementformat to complete is:
Income before depreciation
Depreciation
Income before tax
Income tax
b. Use the financial statement template to indicate the effectsof income taxes on the companyâs financial statements. Assume thecompany pays cash for its taxes as they are due. (There will be twotransactions listed in the financial statement effects template:"Record tax expense for 2013" and "Record tax expense for2014.")
c. The footnote of the 2013 annual report of Farmer Co.disclosed a valuation allowance of $487 related to various deferredtax assets. The 2012 valuation allowance had a balance of $323.
Why did Farmer Co. report the valuation allowance?
Can the valuation allowance be manipulated by managers? Why?
Related questions
Zekany Corporation would have had identical income beforetaxes on both its income tax returns and income statements for theyears 2013 through 2016 except for differences in depreciation onan operational asset. The asset cost $250,000 and is depreciatedfor income tax purposes in the following amounts: |
| 2013 | $ | 82,500 | |
| 2014 | 110,000 | ||
| 2015 | 37,500 | ||
| 2016 | 20,000 | ||
The operational asset has afour-year life and no residual value. The straight-line method isused for financial reporting purposes. |
Income amounts beforedepreciation expense and income taxes for each of the four yearswere as follows. |
| 2013 | 2014 | 2015 | 2016 | |||||||||
| Accountingincome before taxes and depreciation | $ | 135,000 | $ | 155,000 | $ | 145,000 | $ | 145,000 | ||||
Assume the average and marginal income tax rate for 2013and 2014 was 30%; however, during 2014 tax legislation was passedto raise the tax rate to 40% beginning in 2015. The 40% rateremained in effect through the years 2015 and 2016. Both theaccounting and income tax periods end December 31. |
| Required: |
Prepare the journal entries to record income taxes for theyears 2013 through 2016. (If no entry is required for aparticular transaction, select "No journal entry required" in thefirst account field.) |
