Question

earns pretax book net income of $750,000 in 2021 , its first year of operations. recognized $20,000 in bad debt expense for book purposes. This expense is not yet deductible for tax purposes. reports $800,000 of pretax book net income in 2022. did not recognize any bad debt expense for book purposes in 2022 but did deduct $15,000 in bad debt expense for tax purposes. reports no other temporary or permanent book-tax differences. The applicable U.S. Federal corporate income tax rate is 21%, and earns an after-tax rate of return on capital of 4%. Enter below the 2022 end-of-year balance in deferred tax benefit or expense and total tax benefit or expense. If an amount is zero, enter "0". If required, round your answers to the nearest dollar. c. In net present value terms, what has been the cost to Mini of the deferred tax deduction for bad debts? The present value factor at 8% is 0.9615. $

Answer 1

The Total tax benefit/expense is: $333,500 and the Cost of deferred tax deduction (present value) is: $3,028.73.

How is that so?

Mini Company Tax Calculations: 2021 & 2022

2021:

• Pretax book net income: $750,000
• Bad debt expense (book): $20,000
• Taxable income: $770,000 (750,000 + 20,000)
• Income tax expense (21% rate): $161,700 (770,000 x 0.21)
• Deferred tax benefit: $4,200 (20,000 x 0.21)

2022:

• Pretax book net income: $800,000
• Bad debt expense (tax): $15,000
• Taxable income: $785,000 (800,000 - 15,000)
• Income tax expense (21% rate): $164,450 (785,000 x 0.21)
• Deferred tax expense: $3,150 (15,000 x 0.21)

Net Deferred Tax Benefit/Expense:

• Total deferred tax benefit: $4,200 + $3,150 = $7,350

Total Tax Benefit/Expense:

• Total income tax expense: $161,700 + $164,450 = $326,150
• Total tax benefit/expense: $326,150 + $7,350 = $333,500

Cost of Deferred Tax Deduction (Present Value):

• Present value factor (8%): 0.9615
• Cost: $3,150 x 0.9615 = $3,028.73