Assumptions & Model Output Tax Rate: Initial CapEx Spending at the End of Year 0: Annual Depreciation %: Income Statement: Revenue: Cost of Goods Sold (COGS): Gross Profit: 25.0% $ 300 33.3% 33.3% 33.3% Annual Depreciation %: 66.7% 33.3% 0.0% Year 1 Book Accounting Year 2 Year 3 Income Statement: Year 1 Tax Accounting Year 2 Year 3 $ 1,000 $1,000 $ 1,000 Revenue: $ 1,000 $1,000 $ 1,000 100 100 100 900 900 900 Cost of Goods Sold (COGS): Gross Profit: 100 100 900 900 100 900 700 700 700 Operating Expenses: 700 700 700 100 100 100 Depreciation: Operating Expenses: Depreciation: Operating Income: 100 ỗ 100 100 (-) Net Interest Expense: Pre-Tax Income: 100 100 100 Operating Income: (-) Net Interest Expense: Pre-Tax Income: (-) Income Taxes: (25) (25) (25) (-) Income Taxes: Net Income: $ 75 $ སྒ 75 $ 75 Net Income: Which of the following statements is NOT true about the Deferred Income Taxes, Deferred Tax Liability, and Net PP&E over Years 1 - 3? a. Initially, Deferred Income Taxes will be negative since Tax Depreciation is higher than Book Depreciation, but they will turn positive in Year 3. b. The Deferred Tax Liability at the end of Year 1 will be $25. C. On both versions of the statements, the Net PP&E and Deferred Tax Liability will be $0 at the end of Year 3. d. Year 2 will be the only period where the Deferred Taxes are $0.
Assumptions & Model Output Tax Rate: Initial CapEx Spending at the End of Year 0: Annual Depreciation %: Income Statement: Revenue: Cost of Goods Sold (COGS): Gross Profit: 25.0% $ 300 33.3% 33.3% 33.3% Annual Depreciation %: 66.7% 33.3% 0.0% Year 1 Book Accounting Year 2 Year 3 Income Statement: Year 1 Tax Accounting Year 2 Year 3 $ 1,000 $1,000 $ 1,000 Revenue: $ 1,000 $1,000 $ 1,000 100 100 100 900 900 900 Cost of Goods Sold (COGS): Gross Profit: 100 100 900 900 100 900 700 700 700 Operating Expenses: 700 700 700 100 100 100 Depreciation: Operating Expenses: Depreciation: Operating Income: 100 ỗ 100 100 (-) Net Interest Expense: Pre-Tax Income: 100 100 100 Operating Income: (-) Net Interest Expense: Pre-Tax Income: (-) Income Taxes: (25) (25) (25) (-) Income Taxes: Net Income: $ 75 $ སྒ 75 $ 75 Net Income: Which of the following statements is NOT true about the Deferred Income Taxes, Deferred Tax Liability, and Net PP&E over Years 1 - 3? a. Initially, Deferred Income Taxes will be negative since Tax Depreciation is higher than Book Depreciation, but they will turn positive in Year 3. b. The Deferred Tax Liability at the end of Year 1 will be $25. C. On both versions of the statements, the Net PP&E and Deferred Tax Liability will be $0 at the end of Year 3. d. Year 2 will be the only period where the Deferred Taxes are $0.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Consider the scenario shown below, in which a company uses straight-line
over 3 years for Book purposes but accelerated depreciation for Tax purposes. The Book
version contains all the calculations, and the Tax version is mostly blank:
Transcribed Image Text:Assumptions & Model Output
Tax Rate:
Initial CapEx Spending at the End of Year 0:
Annual Depreciation %:
Income Statement:
Revenue:
Cost of Goods Sold (COGS):
Gross Profit:
25.0%
$
300
33.3%
33.3%
33.3%
Annual Depreciation %:
66.7%
33.3%
0.0%
Year 1
Book Accounting
Year 2
Year 3
Income Statement:
Year 1
Tax Accounting
Year 2
Year 3
$ 1,000 $1,000 $ 1,000
Revenue:
$ 1,000 $1,000 $ 1,000
100
100
100
900
900
900
Cost of Goods Sold (COGS):
Gross Profit:
100
100
900
900
100
900
700
700
700
Operating Expenses:
700
700
700
100
100
100
Depreciation:
Operating Expenses:
Depreciation:
Operating Income:
100
ỗ
100
100
(-) Net Interest Expense:
Pre-Tax Income:
100
100
100
Operating Income:
(-) Net Interest Expense:
Pre-Tax Income:
(-) Income Taxes:
(25)
(25)
(25)
(-) Income Taxes:
Net Income:
$
75 $
སྒ
75 $
75
Net Income:
Which of the following statements is NOT true about the Deferred Income Taxes, Deferred Tax
Liability, and Net PP&E over Years 1 - 3?
a. Initially, Deferred Income Taxes will be negative since Tax Depreciation is higher
than Book Depreciation, but they will turn positive in Year 3.
b. The Deferred Tax Liability at the end of Year 1 will be $25.
C.
On both versions of the statements, the Net PP&E and Deferred Tax Liability will be
$0 at the end of Year 3.
d. Year 2 will be the only period where the Deferred Taxes are $0.
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