Wilbur Mills, Inc., began operations in 1999. The firm recognized 12 million of depreciation expense on its income statement and reported 20 million as depreciation on its tax return for 1999. The 1999 income statement shows pre-tax income of 10 million with an income tax rate of 40%Determine the following amounts for 1999a. Income tax expense.b. Income tax payable.c. Difference between the book and tax bases of Wilbur Mills'assets at year-end.d. Deferred tax liability at year-end.

Question

Filo · Accepted Answer

Step by Step Solution:
Step 1. Calculate the income tax expense using the pre-tax income and income tax rate. Income tax expense = pre-tax income x income tax rate = 10,000,000x0.4=4,000,000

Step 2. Calculate the income tax payable using the income tax expense and the difference between the reported tax depreciation and actual tax depreciation. Income tax payable = income tax expense - (reported tax depreciation - actual tax depreciation) = 4,000,000−(20,000,000 - 12,000,000)=4,000,000 - 8,000,000=−4,000,000. Since the income tax payable is negative, it means that the firm has overpaid its taxes and is entitled to a refund.

Step 3. Calculate the difference between the book and tax bases of Wilbur Mills' assets at year-end. The book basis of assets is their cost minus accumulated depreciation, while the tax basis is their cost minus tax depreciation. The difference between the two is called temporary difference. In this case, the temporary difference is equal to the reported tax depreciation minus the actual tax depreciation, or 20,000,000−12,000,000 = $8,000,000.

Step 4. Calculate the deferred tax liability at year-end. Deferred tax liability is the tax that the company will owe in the future as a result of temporary differences. In this case, the deferred tax liability is equal to the temporary difference multiplied by the income tax rate, or 8,000,000x0.4=3,200,000.

Final Answer:
a. Income tax expense = 4,000,000.b.Incometaxpayable=−4,000,000, which means the company is entitled to a refund. c. The difference between the book and tax bases of Wilbur Mills' assets at year-end is 8,000,000.d.Deferredtaxliabilityatyear−endis3,200,000.

Question Text	Wilbur Mills, Inc., began operations in $1999.$ The firm recognized $12$ million of depreciation expense on its income statement and reported $20$ million as depreciation on its tax return for $1999.$ The 1999 income statement shows pre-tax income of $10$ million with an income tax rate of $40%$ Determine the following amounts for 1999a. Income tax expense.b. Income tax payable.c. Difference between the book and tax bases of Wilbur Mills'assets at year-end.d. Deferred tax liability at year-end.
Topic	All Topics
Subject	Accounting
Class	Class 12
Answer Type	Text solution:1

Text solutionVerified

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