question american science corp as had the following experience over the years 2012 t 4305572

question american science corp as had the following experience over the years 2012 t 4305572


American Science Corp (AS) had the following experience over the years 2012 through 2016. Book (accounting) income of $400, $200, $300, $-600, $600. In 2012 AS purchased equipment for $800 with an eight year useful life and no salvage, straight line depreciation. The equipment had a statutory life of five years for tax purposes so tax depreciation was 20%, 32%, 19.2%, 14.4% and 14.4% over the five year tax life. More equipment was purchased in 2013 for $1,000 that had a ten year useful life but the same five year statutory tax life. In 2015 AS was fined $100 by the EPA for the damage caused to the environment which was a violation of environmental laws. In 2014 AS sold goods with a profit of $400 to be collected in 2015 (with a reasonable interest charge for the time value of the money). Collection was reasonably assured and the installment method was selected for tax purposes. AS invested their excess funds in municipal securities and earned $10 each year on these investments. AS set up a non-qualified stock option plan for its top executives January 1, 2012 which provided the executives an option to buy 1 million shares. Each option at grant date has a fair value of $12. The executives had a two year required service period before they could receive or exercise the options. In 2016 all the options were exercised when the market value of the stock was $15 above the exercise price. Tax rates were at 30% until new laws were passed in 2015 changing the rate for 2015 onwards to 40%. No temporary differences existed other than the ones discussed above. (All numbers in thousands.)

1) Prepare the tax journal entry for each year (202016).

2) What would be reported in the balance sheet for deferred tax assets and liabilities for 202016

3) Given the scenario painted above (knowing what you know when you know it not earlier) is there an opportunity minimize the tax bill?

4) Why might minimizing the tax bill not be the right choice?

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