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Chapter 19: Q2P. (page 1102)

The pretax financial income of Truttman Company differs from its taxable income throughout each of 4 years as follows. Pretax Taxable Year Financial Income Income Tax Rate 2017 \(290,000 \)180,000 35% 2018 320,000 225,000 40 2019 350,000 260,000 40 2020 420,000 560,000 40

Pretax financial income for each year includes a nondeductible expense of $30,000 (never deductible for tax purposes). The remainder of the difference between pretax financial income and taxable income in each period is due to one depreciation temporary difference. No deferred income taxes existed at the beginning of 2017. Instructions (a) Prepare journal entries to record income taxes in all 4 years. Assume that the change in the tax rate to 40% was not enacted until the beginning of 2018. (b) Prepare the income statement for 2018, beginning with Income before income taxes.

Short Answer

Expert verified

Depreciation is a term used for fixed assetsof an organization. A depreciation accountis maintained for each depreciating assetto evaluate the opening and closing balanceof the asset in each year.

Step by step solution

01

Working notes to calculate the cumulative temporary difference

Particulars

2017

2018

2019

2020

Pretax financial income

$290,000

$320,000

$350,000

$420,000

Add: Nondeductible expense

$30,000

$30,000

$30,000

$30,000

Total

$320,000

$350,000

$380,000

$450,000

Less: Taxable income

$180,000

$225,000

$260,000

$560,000

Temporary difference

$140,000

$125,000

$120,000

($110,000)

Year

Calculations

Cumulative temporary difference

2017

-

$140,000

2018

$140,000+$125,000

$265,000

2019

$265,000+$120,000

$385,000

2020

$385,000-$110,000

$275,000

02

(a) Journal entries

Date

Particulars

Debit

Credit

2017

Income tax expense

$112,000

Income tax payable

($180,000脳35%)

$63,000

Deferred tax liability

($140,000脳35%)

$49,000

(To record the income tax)

2018

Income tax expense

($140,000脳40%-$49,000)

$7,000

Deferred tax liability

$7,000

(To record the tax expense)

2018

Income tax expense

$140,000

Income tax payable

($225,000脳40%)

$90,000

Deferred tax liability

role="math" localid="1648532101076" [$265,000脳40%-$140,000脳40%]

$50,000

(To record the deferred tax)

2019

Income tax expense

$152,000

Income tax payable

($260,000脳40%)

$104,000

Deferred tax liability

[$385,000脳40%-$265,000脳40%]

$48,000

(To record the expense)

2020

Income tax expense

$180,000

Deferred tax liability

[$275,000脳40%-$385,000脳40%]

$44,000

Income tax payable

($560,000脳40%)

$224,000

(To record the income tax payable)

03

(b) Income Statement

Truttman Company
Income Statement

Particulars

Amount

Income before income taxes

$320,000

Less: Income tax expense

Current tax

$90,000

Deferred tax

$50,000

Adjustments made

$7,000

Net Income

$173,000

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Most popular questions from this chapter

The following information is available for Wenger Corporation for 2016 (its first year of operations). 1. Excess of tax depreciation over book depreciation, \(40,000. This \)40,000 difference will reverse equally over the years 2017鈥�2020. 2. Deferral, for book purposes, of \(20,000 of rent received in advance. The rent will be recognized in 2017. 3. Pretax financial income, \)300,000. 4. Tax rate for all years, 40%. Instructions (a) Compute taxable income for 2016. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016. (c) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming taxable income of $325,000.

At December 31, 2017, Hillyard Corporation has a deferred tax asset of \(200,000. After a careful review of all available evidence, it is determined that it is probable that \)60,000 of this deferred tax asset will not be realized. Prepare the necessary journal entry.

Question: Interest on municipal bonds is referred to as a permanent difference when determining the proper amount to report for deferred taxes. Explain the meaning of permanent differences, and give two other examples.

The following facts relate to Krung Thep Corporation. 1. Deferred tax liability, January 1, 2017, \(40,000. 2. Deferred tax asset, January 1, 2017, \)0. 3. Taxable income for 2017, \(95,000. 4. Pretax financial income for 2017, \)200,000. 5. Cumulative temporary difference at December 31, 2017, giving rise to future taxable amounts, \(240,000. 6. Cumulative temporary difference at December 31, 2017, giving rise to future deductible amounts, \)35,000. 7. Tax rate for all years, 40%. 8. The company is expected to operate profitably in the future. Instructions (a) Compute income taxes payable 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�

(Deferred Taxes, Income Effects) Stephanie Delaney, CPA, is the newly hired director of corporate taxation for Acme Incorporated, which is a publicly traded corporation. Ms. Delaney鈥檚 first job with Acme was the review of the company鈥檚 accounting practices on deferred income taxes. In doing her review, she noted differences between tax and book depreciation methods that permitted Acme to realize a sizable deferred tax liability on its balance sheet. As a result, Acme paid very little in income taxes at that time.

Delaney also discovered that Acme has an explicit policy of selling off plant assets before they reversed in the deferred tax liability account. This policy, coupled with the rapid expansion of its plant asset base, allowed Acme to 鈥渄efer鈥� all income taxes payable for several years, even though it always has reported positive earnings and an increasing EPS. Delaney checked with the legal department and found the policy to be legal, but she鈥檚 uncomfortable with the ethics of it.

Instructions

Answer the following questions.

  1. Why would Acme have an explicit policy of selling plant assets before the temporary differences reversed in the deferred tax liability account?
  2. What are the ethical implications of Acme鈥檚 鈥渄eferral鈥� of income taxes?
  3. Who could be harmed by Acme鈥檚 ability to 鈥渄efer鈥� income taxes payable for several years, despite positive earnings?
  4. In a situation such as this, what are Ms. Delaney鈥檚 professional responsibilities as a CPA?
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