[Anonymous]

Hey, I tried posting this on Yaeger’s message board but I was told that because it isn’t Wiley material they cannot answer it.

They didn’t cover anything with percentages in the lecture and I didn’t come across any questions with percentages in the Wiley software test bank CD so when I saw it on cpareviewforfree.com I got nervous.

Here is just one of the questions that I saw that included these percentages….

In Year One, the Alba Company has sales revenues of $500,000. The company has no other revenues and expenses except for bad debt expense of $200,000. Company officials expect the accounts to prove to be uncollectible as follows: $80,000 in Year Two, $70,000 in Year Three, and $50,000 in Year Four. The enacted tax rate is 26 percent in Year One and 27 percent thereafter. The company believes that there is 65 percent chance that it will have adequate taxable income in Year Two to absorb the bad debt expense but that likelihood drops to 53 percent in Year Three, and 47 percent in Year Four. On its Year One income statement, what does this company report as its total income tax expense?

Can Someone explain how these things work??

Exam on 8/27. Cram review week. Thanks!!

[Anonymous]

Ok, I'm going to take a stab at this, so forgive me if it's incorrect, but here's my explanation based on my understanding of the problem. You have a book/tax timing difference with bad debt expenses (US GAAP you have to recognize in the period the revenues were earned [i.e., matching principle], but under Tax you don't recognize until the year that the account is officially uncollectible).

In this scenario you need to record your income taxes payable as sales revenue * marg tax rate y1 ($500,000 x 26%) as step 1. Step 2 is you need to figure out what your DTA is: $200,000 uncollectible in years 2, 3, and 4 as $80,000, $70,000, and $50,000 respectively. You have a greater than 50% probability of utilizing the benefits of the DTA in years 2 and 3, but only a 47% probability of recognizing the y3 DTA. As a result, your DTA is computed as follows ((y2 = $80,000 * 27%) + (y3 = $70,000 * 27%) = $40,500. Year 4 is not part of the DTA calculation because it is more likely than not that you will not have sufficient income to absorb the year 4 BDE. And your income tax expense is your plug = $89,500. The journal entry would (I believe) look like this:

……..Dr. Deferred Tax Asset….$40,500

……..Dr. Income Tax Expense.$89,500

……………………………….Cr. Income Taxes Payable $130,000

At least that's my best guess based on my understanding. Someone feel free to jump in if they disagree.

[jenuno01]

Ok I am about to take a Napuela, so my judgment might be impaired. I like Baseball's JE's, a good accountant figures everything out that way. Since they're asking for year 1, wouldn't you just take (500,000-200,000) *.27 =81,000

I am 0.01% confident in my answer. Baseball's answer looks smarter lol.

P.S. “They didn't cover anything with percentages in the lecture and I didn't come across any questions with percentages in the Wiley software test bank CD”— Are you sure?! I can almost swear on the Napuela I am about to take that Wiley has a tooooon of DTA & DTL problems, all involving calculations; thus, all with percentages lol.

Class of 2012

[Anonymous]

@Jenuno – I was always taught to plug for tax expense because Income Taxes Payable is what you're going to pay to Uncle Sam, the DTA is the book/timing differences at the marginal tax rate, and the plug is income tax expense. I wish it was done your way though, it would make things much easier!

[Author]

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