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CASE 127 Accounting for Income Taxes: Different Approaches Mark or Make is a bourbon distillery....

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Accounting

CASE 127 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

Assume that the rental is deducted on the corporate tax purposes in 2019 and that there are no other temporary differences between taxable income and pretax accounting income. In addition, there are no permanent differences between taxable income and pretax accounting income. The corporate tax rate for all three years is 30 percent.

Required:

  1. Construct income statements for 2019, 2020, and 2021 under the following approaches to interperiod income tax allocation:
    1. No allocation
    2. Comprehensive allocation
  2. Do you believe that no allocation distorts Mark or Makes net income? Explain.

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