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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

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�

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%.

The pretax financial income (or loss) figures for Jenny Spangler Company are as follows:

2012- $160,000

2013- 250,000

2014- 80,000

2015- 160,000

2016- 380,000

2017- 120,000

2018- 100,000

Pretax financial income (or loss) and taxable income (loss) were the same for all the given years. Assume a 45% tax rate for 2012 and 2013, and a 40% tax rate for the remaining years. Instructions (a) Prepare the journal entries for the years 2014 to 2018 to record the income tax expense and effects of the net operating loss carrybacks and carryforwards assuming Jenny Spangler Company using the carryback provision. All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.)

Callaway Corp. has a deferred tax asset account with a balance of \(150,000 at the end of 2017 due to a single cumulative temporary difference of \)375,000. At the end of 2018, this same temporary difference has increased to a cumulative amount of \(500,000. Taxable income for 2018 is \)850,000. The tax rate is 40% for all years.

Instructions

(a)Record income tax expense, deferred income taxes, and income taxes payable for 2018, assuming that it is probable that the deferred tax asset will be realized.

(b) Assuming that it is probable that $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2018 to recognize this probability.

Which of the following statements is correct with regard to IFRS and GAAP? (a) Under GAAP, all potential liabilities related to uncertain tax positions must be recognized. (b) The tax effects related to certain items are reported in equity under GAAP; under IFRS, the tax effects are charged or credited to income. (c) IFRS uses an affirmative judgment approach for deferred tax assets, whereas GAAP uses an impairment approach for deferred tax assets. (d) IFRS classifies deferred taxes based on the classification of the asset or liability to which it relates.
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