At the End of Its First Year of Operations on December

question 19

Essay

At the end of its first year of operations on December 31, 2014, the GAC Company reported taxable income of $30,000 and a pretax financial loss of $40,000. Differences between taxable income and pretax financial income included estimated bad debt expense for which accounts were expected to be written off in 2015, $20,000, and warranty costs expensed for accounting purposes in excess of cash paid for warranty claims, $50,000. The warranty costs are expected to be paid in 2015. The enacted tax rate for 2014 and 2015 is 30%.
Required:
a.Prepare the income tax journal entry for the GAC Company on December 31, 2014, assuming that it is more likely than not that the deferred tax asset will be realized.
b.Prepare the income tax journal entry for the GAC Company on December 31, 2014, assuming that it is more likely than not that 40% of the deferred tax asset from the warranty costs will not be realized.

---

Definitions:

False Negatives

Errors where a test result incorrectly indicates no presence of a condition when it is actually present.

Unprofitable Project

A project that generates a financial loss rather than profit for an organization, indicating that expenses exceed revenues.

Profitable Project

A venture or initiative that is expected to result in financial gain, exceeding the costs involved in its execution.

Difference-In-Difference

A statistical technique used to measure the effect of a treatment or intervention by comparing the changes in outcomes over time between a treatment group and a control group.