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Using the information from the case below develop a Spreadsheet to find income tax expense and net
income for the years
2007
to 20
1
4 for the Quark Donut Company Inc.
Submit the spreadsheet results and the formulas and answer al
l
questions required below!
THE CASE
Quark Donut Company was incorporated (as a C corporation) and started business in
200
7, make and sell donuts. Quark rented
space in a local mall with a 8 year operating lease. Quark’s only capital expenditure
was the purchase in January of
200
7 of equipment at a
cost of $280,000. This equipment has an economic life of 8 years and 0 expected salvage value. Quark uses straight line dep
reciation for
computation of GAAP net income because this best reflects the t
rue economic depreciation of the equipment. For income tax purposes
Quark is permitted to use MACRS (the modified accelerated cost recovery system), and the equipment is considered to be in th
e 7 year
class. Therefore the allowed MACRS rates are: 14.29
% the first year, 24.49% the second year, 17.49% the third year, 12.49% the fourth
year 8.93% the fifth year, 8.92% in the sixth 8.93% in the seventh year and 4.46% in the 8th year. Depreciation is the onl
y non

cash
expense, and is the only source of a
difference between taxable income and financial accounting income before tax. Assume an income
tax rate of 35% is enacted for the years
200
7

200
9. During the year 20
1
0 a new income tax rate of 30% was enacted for 2
0
1
0 to 20
1
4.
Projected revenues an
d operating expenses (excluding taxes and depreciation) are as follows:
Year
2007
2008
200
9
20
1
0
Revenues
$150,000
$180,000
$185,000
$190,000
Expenses
$100,000
$110,000
$113,000
$116,000
Year
20
1
1
20
1
2
20
13
201
4
Revenues
$195,000
$200,000
$
200,000
$200,000
Expenses
$127,000
$132,000
$135,000
$138,000
_____________________________________________________________
Required:
I.
Use a spreadsheet to find: (note: your spreadsheet is the answer to part I)
a.
income taxes paid that year(curren
t income tax payable)
b.
deferred tax liability
c.
the change in deferred tax liability (equal to deferred income tax expense)
d.
total income tax expense,
e.
net income
II.
Using the numbers from your spreadsheet hand write the correct journal
entry for
income taxes for the year 20
1
0.
III.
Find the effective tax rate for 20
1
0 and explain why the
effective
tax rate for 20
1
0 is not 30%

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