Case - Accounting for Income Taxes-Different Approaches

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Question - Case - Accounting for Income Taxes: Different Approaches

Mark or Make is a bourbon distillery. Sales have been steady for the past three years, and operating costs have remained unchanged. On January 1, 2019, Mark or Make took advantage of a special deal to prepay its rent for three years at a substantial savings. The amount of the prepayment was $60,000. The income statement items (excluding the rent) are shown here.

	2019	2020	2021
Gross profit on sales:	350,000	349,000	351,000
Operating expense:	210,000	210,000	210,000

c) For years 2019 and 2020, Mark or Make reported net income applying the concept of comprehensive inter period income tax allocation. During 2020, Congress passed a new tax law that will increase the corporate tax rate from 30 to 33%. Reconstruct the income statements for 2020 and 2019 under the following assumptions:

i) Mark or Make uses the deferred method to account for interperiod income tax allocation?

ii) Mark or Make uses the asset-liability approach to account for interperiod income tax allocation?

d) Which of the two approaches used in question (a) provides measures of income and liabilities that are useful to decision makers? Explain.

Reference no: EM132714778

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