Final answer:
Mini's 2022 end-of-year deferred tax asset balance is $1,050, and the net present value cost of the deferred $5,000 tax deduction for bad debts is $4,807.50 using an 8% discount rate.
Step-by-step explanation:
The question pertains to calculating the end-of-year balance in Mini's deferred tax benefit or expense and total tax benefit or expense for 2022, and the net present value cost of the deferred tax deduction for bad debts. In 2021, Mini recognized a $20,000 bad debt expense for book purposes which was not deductible for tax purposes. In 2022, Mini deducted $15,000 in bad debt expense for tax purposes, although it didn't recognize any bad debt expense for book purposes. There are no other temporary or permanent book-tax differences noted.
To calculate the 2022 end-of-year balance in Mini's deferred tax benefit, we would adjust for the $20,000 that was recognized in 2021 but not deductible until 2022 and consider the $15,000 deduction taken in 2022. With a tax rate of 21%, the deferred tax asset created at the end of 2021 would be $4,200 (21% of $20,000). Then, when $15,000 of the bad debt expense is deductible in 2022, this would lead to a tax benefit of $3,150 (21% of $15,000). The remaining balance of the deferred tax asset would be $1,050 ($4,200 - $3,150) at the end of 2022.
The net present value (NPV) cost of the deferred tax deduction for bad debts requires the calculation of the future tax savings in today's dollars. The NPV of the deferred $5,000 ($20,000 - $15,000) tax deduction is $5,000 multiplied by the present value factor at 8%, which is 0.9615. Therefore, the NPV cost is $4,807.50 ($5,000 ×0.9615).