25. Award: 10.00 points Problems? Adjust credit for all students.

Mr. Gilly is the PFO of Petro Inc. This year, his compensation package was $625,000. Petro paid him a $500,000 salary during the year
and accrued an unfunded liability to pay him the $125,000 balance in the year he retires at age 60. Petro Inc. pays $125,000 deferred
compensation to Mr. Gilly in 2025, the year of his retirement.

a. How much compensation income does Mr. Gilly recognize in 2025?

b. What is Petro's 2025 tax deduction for the payment to Mr. Gilly?
c. What is the effect of the payment on Petro’s 2025 book income and deferred taxes? Assume a 21 percent tax rate.

Complete this question by entering your answers in the tabs below.

Required A Required B Required C

How much compensation income does Mr. Gilly recognize in 2025?

Compensation income $ 125,000

 Required A Required B 

 
Explanation:

a. As a cash basis taxpayer, Mr. Gilly recognizes the $125,000 deferred compensation received during the year.
b. Petro’s tax deduction is $125,000.
c. The payment has no effect on Petro’s book income and causes a reversal of the $26,250 deferred tax asset recorded in the year the
deferred compensation expense was accrued.

References

Worksheet Difficulty: 2 Medium Learning Objective: 15-06 Contrast defined-benefit,

defined-contribution, and nonqualified deferred
compensation plans.

This study source was downloaded by 100000826825978 from CourseHero.com on 04-17-2023 04:34:41 GMT -05:00

https://www.coursehero.com/file/62109369/Taxation-Assignment-7pdf/
  
 25. Award: 10.00 points Problems? Adjust credit for all students.

Mr. Gilly is the PFO of Petro Inc. This year, his compensation package was $625,000. Petro paid him a $500,000 salary during the year
and accrued an unfunded liability to pay him the $125,000 balance in the year he retires at age 60. Petro Inc. pays $125,000 deferred
compensation to Mr. Gilly in 2025, the year of his retirement.

a. How much compensation income does Mr. Gilly recognize in 2025?

b. What is Petro's 2025 tax deduction for the payment to Mr. Gilly?
c. What is the effect of the payment on Petro’s 2025 book income and deferred taxes? Assume a 21 percent tax rate.

Complete this question by entering your answers in the tabs below.

Required A Required B Required C

What is Petro's 2025 tax deduction for the payment to Mr. Gilly?

Petro’s tax deduction $ 125,000

 Required A Required C 

 
Explanation:

a. As a cash basis taxpayer, Mr. Gilly recognizes the $125,000 deferred compensation received during the year.
b. Petro’s tax deduction is $125,000.
c. The payment has no effect on Petro’s book income and causes a reversal of the $26,250 deferred tax asset recorded in the year the
deferred compensation expense was accrued.

References

Worksheet Difficulty: 2 Medium Learning Objective: 15-06 Contrast defined-benefit,

defined-contribution, and nonqualified deferred
compensation plans.

This study source was downloaded by 100000826825978 from CourseHero.com on 04-17-2023 04:34:41 GMT -05:00

https://www.coursehero.com/file/62109369/Taxation-Assignment-7pdf/
  
 25. Award: 10.00 points Problems? Adjust credit for all students.

Mr. Gilly is the PFO of Petro Inc. This year, his compensation package was $625,000. Petro paid him a $500,000 salary during the year
and accrued an unfunded liability to pay him the $125,000 balance in the year he retires at age 60. Petro Inc. pays $125,000 deferred
compensation to Mr. Gilly in 2025, the year of his retirement.

a. How much compensation income does Mr. Gilly recognize in 2025?

b. What is Petro's 2025 tax deduction for the payment to Mr. Gilly?
c. What is the effect of the payment on Petro’s 2025 book income and deferred taxes? Assume a 21 percent tax rate.

Complete this question by entering your answers in the tabs below.

Required A Required B Required C

What is the effect of the payment on Petro’s 2025 book income and deferred taxes? Assume a 21 percent tax rate.

Book Income No effect   $ 0

Deferred tax asset   decrease by   $ 26,250

 Required B Required C 

 
Explanation:

a. As a cash basis taxpayer, Mr. Gilly recognizes the $125,000 deferred compensation received during the year.
b. Petro’s tax deduction is $125,000.
c. The payment has no effect on Petro’s book income and causes a reversal of the $26,250 deferred tax asset recorded in the year the
deferred compensation expense was accrued.

References

Worksheet Difficulty: 2 Medium Learning Objective: 15-06 Contrast defined-benefit,

defined-contribution, and nonqualified deferred
compensation plans.

This study source was downloaded by 100000826825978 from CourseHero.com on 04-17-2023 04:34:41 GMT -05:00

https://www.coursehero.com/file/62109369/Taxation-Assignment-7pdf/
  
 26. Award: 10.00 points Problems? Adjust credit for all students.

This year, Mrs. Bard, who is head of Lyton Industries’s accounting and tax department, received a
compensation package of $360,000. The package consisted of a $300,000 current salary and
$60,000 deferred compensation. Lyton will pay the deferred compensation in three annual $20,000
installments beginning with the year in which Mrs. Bard retires. Lyton accrued a $60,000 unfunded
liability for the deferred compensation on its current year financial statements.

a. How much compensation income does Mrs. Bard recognize this year?
b. What is Lyton Industries's book expense for Mrs. Bard's current compensation?
c. What is Lyton Industries's tax deduction for Mrs. Bard's current compensation?
d. Assuming a 21 percent tax rate, compute Lyton Industries's deferred tax asset or deferred tax
liability (identify which) resulting from the compensation expense.

a. Compensation income recognizes by Mrs. Bard $ 300,000

b. Lyton's book expense $ 360,000
c. Lyton's tax deduction $ 300,000
d. Deferred tax asset   $ 12,600

 
Explanation:

a. As a cash basis taxpayer, Mrs. Bard recognizes the $300,000 compensation (current salary)
received during the year.
b. Lyton Industries's book expense is $360,000 (total compensation paid and accrued for Mrs.
Bard).
c. Lyton Industries's tax deduction is limited to the $300,000 that Mrs. Bard included in gross
income.
d. Lyton Industries's deferred tax asset is $12,600 ($60,000 nondeductible deferred compensation
expense × 21%).

References

Worksheet Difficulty: 2 Medium Learning Objective: 15-06 Contrast

defined-benefit, defined-contribution, and
nonqualified deferred compensation
plans.

This study source was downloaded by 100000826825978 from CourseHero.com on 04-17-2023 04:34:41 GMT -05:00

https://www.coursehero.com/file/62109369/Taxation-Assignment-7pdf/
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