xes = (tax rate)(DDB - SL) = $300
·         Tax expense = (taxes payable + deferred taxes) = $2,700
Year 2:
·         Taxes payable = (tax rate)(taxable income) = $2,800
·         Deferred taxes = (tax rate)(DDB - SL) = -$100
·         Tax expense = (taxes payable + deferred taxes) = $2,700
Assume that beginning in year two, the tax rate is reduced from 30% to 20%. Thus, the deferred tax liability of $300 using 30% would be r*ued to $200 reflecting the new tax rate of 20%. The $100 decrease in the deferred tax liability would reduce year 2 income tax expense:
·         Taxes payable = (.20)($9,333) = $1,867
·         Deferred taxes = (.20)($667 - 1,000) = -$67
·         Tax expense = $1,867 -$67 - $100 = $1,700
1.B: Analysis of Financing Liabilities
a: Compute the effects of debt issuance and amortization on the income statement, balance sheet, and cash flow statement.
 
Income Statement:
Interest expense = the market rate at issue times the balance sheet value of the liability at the beginning of the period.
Issues at Par
Issued at a Premium
Issued at a Discount
Market rate = face rate
Market rate < face rate
Market rate > face rate
Interest expense = face rate times face value = cash paid
Interest expense = cash paid - amortization of premium
Interest expense = cash paid + amortization of discount
Interest is constant
Interest decreases over time
Interest increases over time