Accounting Case Study: Purchase of Equipment and Impact on Financial Statements

Running head: ACCOUNTING
Accounting
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1ACCOUNTING
Table of Contents
Answer (a)..................................................................................................................................2
Answer (b)..................................................................................................................................2
Answer (c)..................................................................................................................................3
Answer (d)..................................................................................................................................4
Reference....................................................................................................................................6

2ACCOUNTING
As per the given case study Whitley Corporation is earning steady income as well as
steady increase in the EPS. However, owing to recession sales of the company fell and the
management is focussing on improving the appearance of financial statements. Apart from
that the company require new plant and equipment for which the company has sufficient
cash. However the company is in dilemma regarding whether the equipment shall be
purchased in the current year or it shall wail till the next year for purchasing the equipment.
Sufficient information for computation of depreciation that must be deducted from
pre-tax accounting income amounted to $ 200,000, if the equipment is purchased is not
available. Therefore, computation will be done taking into consideration the impact of
deferred tax only and the depreciation will be ignored (Laux, 2013).
Answer (a)
Amount of income tax that would be payable by Whitley if the company waits to
purchase equipment till next year is computed as follows –
Particular Amount
Pre-tax accounting income $ 2,00,000.00
Less: Reversal of the deductible amount $ -37,500.00
Add: Reversal of the taxable amount $ 42,500.00
Taxable income $ 2,05,000.00
Rate of tax 40%
Amount of payable tax $ 82,000.00
Reduction in deferred tax asset $ 15,000.00
Less: Reduction in deferred tax liability $ 17,000.00
Expenses for income tax $ 80,000.00
Answer (b)
If Whitley Corporation decides to purchase equipment in the current year that is in
2013, the tax payable by the company would be as follows –