[youshallpass]

Becker Question –

If anyone could explain to me what the rationale is in calculating the taxable income I’d appreciate it. I’m lost on this one.

Pretax Income: $300,000

Tax Rate: 30%

---

Tax

---

Book

Depreciation Expense: $95,000

---

$70,000

---

(25,000)

Royalty Income: 80,000

---

50,000

---

30,000

Life Insurance Expense: 0

---

5,000

---

5,000

Bad Debts Expense: 7,000

---

12,000

---

5,000

Life Insurance: 0

---

20,000

---

(20,000)

Taxable Income:

---

$295,000

---

x 30%

Taxable Expense (Current Portion):

---

$88,500

[youshallpass]

Sorry about the formatting. Best I could do.

[youshallpass]

Sorry about the formatting. Best I could do.

[Anonymous]

I just want to make sure I'm responding correctly. If what you've provided as the solution your answer or is that how Becker says to do it and you want to know the reasoning behind each difference and the final calculation of current tax expense?

[Anonymous]

I just want to make sure I'm responding correctly. If what you've provided as the solution your answer or is that how Becker says to do it and you want to know the reasoning behind each difference and the final calculation of current tax expense?

[youshallpass]

The latter. The reasoning behind each difference. The method used to solve tax questions in the book is formatted differently so I'm a little confused with this.

[youshallpass]

The latter. The reasoning behind each difference. The method used to solve tax questions in the book is formatted differently so I'm a little confused with this.

[Anonymous]

Depreciation differences between book and tax arise from the use of different depreciation methods (i.e. MACRS for tax and straight line for books). When paying taxes, income must be adjusted to reflect the proper amount of taxable income, which is why the $25,000 of additional depreciation expense for tax purposes must further reduce the book pretax income.

Royalty income causes differences because when it's collected in advance, it is reported as unearned income (DR Cash; CR Unearned Royalty Income). The cash collected that wasn't earned at year end wasn't reported in pretax income. Tax doesn't allow this. The IRS see's it as, you received cash so pay taxes on it. This is why the $30,000 was added to book pretax income.

Life insurance expenses and proceeds for this problem are neither recognized as expenses OR revenue for tax purposes. Since the $5,000 was expensed to arrive at pretax income, it must be added back in to taxable income. The proceeds of $20,000 are not taxable, and must be removed from pretax income.

The bad debt difference is due to tax not allowing estimated expenses, which is what the $12,000 on the books is. The $7,000 per tax is the amount actually written off during the year. The difference of $5,000 must be added back in.

So, in the end, you have:

300,000

(25,000)

30,000

5,000

5,000

(20,000)

---

295,000 = taxable income for tax purposes

x 30%

---

88,500 = current tax expense

[Anonymous]

Depreciation differences between book and tax arise from the use of different depreciation methods (i.e. MACRS for tax and straight line for books). When paying taxes, income must be adjusted to reflect the proper amount of taxable income, which is why the $25,000 of additional depreciation expense for tax purposes must further reduce the book pretax income.

Royalty income causes differences because when it's collected in advance, it is reported as unearned income (DR Cash; CR Unearned Royalty Income). The cash collected that wasn't earned at year end wasn't reported in pretax income. Tax doesn't allow this. The IRS see's it as, you received cash so pay taxes on it. This is why the $30,000 was added to book pretax income.

Life insurance expenses and proceeds for this problem are neither recognized as expenses OR revenue for tax purposes. Since the $5,000 was expensed to arrive at pretax income, it must be added back in to taxable income. The proceeds of $20,000 are not taxable, and must be removed from pretax income.

The bad debt difference is due to tax not allowing estimated expenses, which is what the $12,000 on the books is. The $7,000 per tax is the amount actually written off during the year. The difference of $5,000 must be added back in.

So, in the end, you have:

300,000

(25,000)

30,000

5,000

5,000

(20,000)

---

295,000 = taxable income for tax purposes

x 30%

---

88,500 = current tax expense

[Anonymous]

I'm on this right now as well. I believe I have it down. This is how I comprehend it. Hope it helps.

[Anonymous]

I'm on this right now as well. I believe I have it down. This is how I comprehend it. Hope it helps.

[youshallpass]

Thank you so much. That makes complete sense now. Looks like we both have our exam on the same day. Good Luck.

[youshallpass]

Thank you so much. That makes complete sense now. Looks like we both have our exam on the same day. Good Luck.

[Anonymous]

You too, thanks.

[Anonymous]

You too, thanks.

[Author]

Replies