# Exercise 16-16 (Algo): Multiple Differences; Financial Statement Effects ## Given Data - **Pretax accounting income (2027):** $936,000 - **Interest income on municipal government bonds (tax-exempt):** $38,400 - **Actual warranty expenditures:** $36,400 - **Warranty expense (financial reporting):** $48,840 - **Deferred tax asset (warranty liability):** Need to be calculated - **Income tax rate:** *Not specified — use as "t" in solution* --- ## 1.a. Compute Taxable Income and Income Tax ### Adjustments to Pretax Accounting Income 1. **Tax-exempt interest:** Deduct from pretax income for tax purposes. 2. **Warranty expense difference:** - Financial statements: $48,840 expense - Tax return: Only actual expenditures ($36,400) are deductible - **Temporary difference**: $48,840 - $36,400 = $12,440 (will reverse in the future) #### **Taxable Income Calculation** \[ \begin{align*} \text{Pretax accounting income} & = \$936,000 \\ \text{Less: Tax-exempt interest} & = -\$38,400 \\ \text{Add: Excess warranty expense (book over tax)} & = +\$12,440 \\ \hline \text{Taxable income} & = \$910,040 \\ \end{align*} \] ### **Income Tax Calculations** - **Current tax expense:** $\text{Taxable income} \times t = \$910,040 \times t$ - **Deferred tax asset (warranty liability):** Temporary difference: $12,440$ Deferred tax asset: $12,440 \times t$ - **Total income tax expense:** \[ \text{Current tax expense} - \text{Increase in deferred tax asset} \] --- ## 1.b. Journal Entry for 2027 **Assuming "t" is the income tax rate:** - **Income tax expense:** $(\$910,040 \times t) - (\$12,440 \times t)$ - **Deferred tax asset:** $+(\$12,440 \times t)$ - **Income tax payable:** $-(\$910,040 \times t)$ **Journal Entry:** ```markdown | Account | Debit | Credit | |--------------------------|-------------------|------------------| | Income tax expense | [calc] | | | Deferred tax asset | [calc] | | | Income tax payable | | [calc] | ``` Where: - Income tax expense = $(\$910,040 \times t) - (\$12,440 \times t)$ - Deferred tax asset = $(\$12,440 \times t)$ - Income tax payable = $(\$910,040 \times t)$ --- ## 2. Net Income for 2027 \[ \text{Net income} = \text{Pretax accounting income} - \text{Total income tax expense} \] Where: - Pretax accounting income = $936,000$ - Total income tax expense = $(\$910,040 \times t) - (\$12,440 \times t)$ \[ \text{Net income} = \$936,000 - [(\$910,040 \times t) - (\$12,440 \times t)] \] --- ## Summary Table | Item | Amount | |--------------------------|-----------------| | Pretax accounting income | $936,000 | | Tax-exempt interest | $38,400 | | Warranty: Book | $48,840 | | Warranty: Tax | $36,400 | | Temporary difference | $12,440 | | Taxable income | $910,040 | | Current tax expense | $910,040 × t | | Deferred tax asset | $12,440 × t | | Total tax expense | $(910,040 \times t) - (12,440 \times t)$ | | Net income | $936,000 - [(\$910,040 \times t) - (\$12,440 \times t)]$ | --- **Note:** - Substitute actual tax rate for "t" if provided. - If the income tax rate is, for example, 25%, then $t = .25$. --- ## Alt Text _No images provided; all information presented in tables and formulas._