Big Deal Vs Small [PDF]

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Big-Deal Construction Company specializes in building dams. During Years 3, 4, and 5, three dams were completed. The first dam was started in Year 1 and completed in Year 3 at a profit before income taxes of $240,000. The second and third dams were started in Year 2. The second dam was completed in Year 4 at a profit before income taxes of $252,000, and the third dam was completed in Year 5 at a profit before income taxes of $300,000. The company uses percentage-of-completion accounting for financial reporting and the completed-contract method of accounting for income tax purposes. The applicable income tax rate is 50% for each of the Years 1 through 5. Create a table outlining the year 1-5 numbers. One with total book income, one with total taxable income, and then show the difference between the two.



Dam 1 2 3



Y1



Y2



Y3



20%



60%



20%



30%



60%



10%



10%



30%



50%



(a) Finacial reporting (book) income Y1 Dam Book Income $ 24,000 1 Book Income 2 Book Income 3 Total Income (p) $24,000 (b) Taxable Income Taxable Income Taxable Income Taxable Income Total TI (q) Income after Tax (d=p-r)



Y2 $ 72,000 $ 37,800 $ 15,000 $124,800



Y4



Y3 Y4 $ 24,000 $ 75,600 $ 12,600 $ 45,000 $ 75,000 $144,600 $ 87,600



$ 120,000



1 2 3



$ 126,000 $



-



$



-



$120,000



$ 24,000 $ 124,800 $



24,600



$126,000 $ (38,400)



ompleted. The first dam was d dams were started in Year 2. as completed in Year 5 at a ial reporting and the for each of the Years 1 e income, and then show the



Y5



10%



Y5



Total $120,000 $126,000 $ 15,000 $150,000 $ 15,000 $396,000



$120,000 $126,000 $ 150,000 $150,000 $150,000 $396,000 $(135,000)