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Chapter 19: Q10E. (page 1097)

The following facts relate to Duncan Corporation. 1. Deferred tax liability, January 1, 2017, \(60,000. 2. Deferred tax asset, January 1, 2017, \)20,000. 3. Taxable income for 2017, \(105,000. 4. Cumulative temporary difference at December 31, 2017, giving rise to future taxable amounts, \)230,000. 5. Cumulative temporary difference at December 31, 2017, giving rise to future deductible amounts, $95,000. 6. Tax rate for all years, 40%. No permanent differences exist. 7. The company is expected to operate profitably in the future. Instructions (a) Compute the amount of pretax financial income for 2017. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017. (c) Prepare the income tax expense section of the income statement for 2017, beginning with the line 鈥淚ncome before income taxes.鈥� (d) Compute the effective tax rate for 2017.

Short Answer

Expert verified

Deductibles are the amount that an organization can claim while filing their income tax return. It helps the organization in decreasing its total income tax expense.

Step by step solution

01

Computation of originating difference

Particulars

Amount

Cumulative temporary difference at the end

$230,000

Less: Cumulative temporary difference at the beginning ($60,00040%)

$150,000

Originating difference in 2017 (taxable)

$80,000

Particulars

Amount

Cumulative temporary difference at the end

$95,000

Less: Cumulative temporary difference at the beginning ($20,00040%)

$50,000

Originating difference in 2017 (deductible)

$45,000

02

(a) Computation of financial income for 2017.

Particulars

Amount

Originating difference in 2017 (taxable)

$80,000

Less: Originating difference in 2017 (deductible)

$45,000

Add: Taxable income for 2017

$105,000

Pretax financial income for 2017

$140,000

03

(b) Preparation of the journal entry

Date

Particulars

Debit

Credit

2017

Income tax expense ($105,000脳40%)

$42,000

Income tax payable

$42,000

(To record the income tax expense)

2017

Deferred tax asset

$20,000

Profit and loss

$20,000

(To record the deferred tax asset)

2017

Profit and loss

$60,000

Deferred tax liability

$60,000

(To record the deferred tax liability)

04

(c) Preparation of the income statement

Income Statement

Particulars

Amount

Income before income taxes

$140,000

Less: Income tax expense

Current expense

$42,000

Deferred expense

$14,000

$56,000

Net Income

$84,000

05

(d) Computation of effective tax rate

Effectivetaxrate=(IncomtaxexpenseIncomebeforeincometax)=($56,000$140,000)=40%

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Most popular questions from this chapter

The accounting records of Shinault Inc. show the following data for 2017 (its first year of operations).

1. Life insurance expense on officers was \(9,000.

2. Equipment was acquired in early January for \)300,000. Straight-line depreciation over a 5-year life is used with no salvage value. For tax purposes, Shinault used a 30% rate to calculate depreciation.

3. Interest revenue on State of New York bonds totaled \(4,000.

4. Product warranties were estimated to be \)50,000 in 2017. Actual repair and labor costs related to the warranties in 2017 were \(10,000. The remainder is estimated to be paid evenly in 2018 and 2019.

5. Gross profit on an accrual basis was \)100,000. For tax purposes, \(75,000 was recorded on the installment-sales method.

6. Fines incurred for pollution violations were \)4,200.

7. Pretax financial income was $750,000. The tax rate is 30%.

Instructions (a) Prepare a schedule starting with pretax financial income in 2017 and ending with taxable income in 2017. (b) Prepare the journal entry for 2017 to record income taxes payable, income tax expense, and deferred income taxes.

Shetland Inc. had pretax financial income of \(154,000 in 2017. Included in the computation of that amount is insurance expense of \)4,000 which is not deductible for tax purposes. In addition, depreciation for tax purposes exceeds accounting depreciation by $10,000. Prepare Shetland鈥檚 journal entry to record 2017 taxes, assuming a tax rate of 45%.

Jennifer Capriati Corp. has a deferred tax asset account with a balance of \(150,000 at the end of 2016 due to a single cumulative temporary difference of \)375,000. At the end of 2017, this same temporary difference has increased to a cumulative amount of \(450,000. Taxable income for 2017 is \)820,000. The tax rate is 40% for all years. No valuation account related to the deferred tax asset is in existence at the end of 2016. Instructions (a) Record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming that it is more likely than not that the deferred tax asset will be realized. (b) Assuming that it is more likely than not that $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2017 to record the valuation account.

Button Company has the following two temporary differences between its income tax expense and income taxes payable2017 2018 2019 Pretax financial income \(840,000 \)910,000 \(945,000 Excess depreciation expense on tax return (30,000) (40,000) (10,000) Excess warranty expense in financial income 20,000 10,000 8,000 Taxable income \)830,000 \(880,000 \)943,000 The income tax rate for all years is 40%. Instructions (a) Assuming there were no temporary differences prior to 2017, prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017, 2018, and 2019. (b) Indicate how deferred taxes will be reported on the 2019 balance sheet. Button鈥檚 product warranty is for 12 months. (c) Prepare the income tax expense section of the income statement for 2019, beginning with the line 鈥淧retax financial income.鈥�

Instructions Complete the following statements by filling in the blanks. (a) In a period in which a taxable temporary difference reverses, the reversal will cause taxable income to be _______ (less than, greater than) pretax financial income. (b) If a \(76,000 balance in Deferred Tax Asset was computed by use of a 40% rate, the underlying cumulative temporary difference amounts to \)_______. (c) Deferred taxes ________ (are, are not) recorded to account for permanent differences. (d) If a taxable temporary difference originates in 2017, it will cause taxable income for 2017 to be ________ (less than, greater than) pretax financial income for 2017. (e) If total tax expense is \(50,000 and deferred tax expense is \)65,000, then the current portion of the expense computation is referred to as current tax _______ (expense, benefit) of \(_______. (f) If a corporation鈥檚 tax return shows taxable income of \)100,000 for Year 2 and a tax rate of 40%, how much will appear on the December 31, Year 2, balance sheet for 鈥淚ncome taxes payable鈥� if the company has made estimated tax payments of \(36,500 for Year 2? \)________. (g) An increase in the Deferred Tax Liability account on the balance sheet is recorded by a _______ (debit, credit) to the Income Tax Expense account. (h) An income statement that reports current tax expense of \(82,000 and deferred tax benefit of \)23,000 will report total income tax expense of \(________. (i) A valuation account is needed whenever it is judged to be _______ that a portion of a deferred tax asset _______ (will be, will not be) realized. (j) If the tax return shows total taxes due for the period of \)75,000 but the income statement shows total income tax expense of \(55,000, the difference of \)20,000 is referred to as deferred tax _______ (expense, benefit).
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