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Chapter 19: Q4P. (page 1103)

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.

Short Answer

Expert verified

Installment-sales method is a type of accounting recognition method where the revenue and expense of an organization is recorded only when the firm receives or pays cash.

Step by step solution

01

(a) Calculation of the pretax financial income

Particulars

Amount

Pretax financial income

$750,000

Add: Insurance expense

$9,000

Less: Bond interest revenue

$4,000

Add: Pollution fines

$4,200

Less: Depreciation expense

[$300,0005+$300,000脳30%]

$150,000

Less: Installment sales ($100,000-$75,000)

$25,000

Add: Warranty expense ($50,000-$10,000)

$40,000

Taxable income

$624,200

02

(b) Journal entry

Date

Particulars

Debit

Credit

2017

Income tax expense

$188,760

Deferred tax asset($40,000脳30%)

$ 12,000

Deferred tax liability

($20,000脳30%+$25,000脳30%)

$13,500

Income tax payable($624,200脳30%)

$187,260

(To record the income tax expense)

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Most popular questions from this chapter

Listed below are items that are commonly accounted for differently for financial reporting purposes than they are for tax purposes. Instructions For each item below, indicate whether it involves: (1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset. (2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability. (3) A permanent difference. Use the appropriate number to indicate your answer for each. (a) ______ The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes for some plant assets. (b) ______ A landlord collects some rents in advance. Rents received are taxable in the period when they are received. (c) ______ Expenses are incurred in obtaining tax-exempt income. (d) ______ Costs of guarantees and warranties are estimated and accrued for financial reporting purposes. (e) ______ Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes. (f) ______ For some assets, straight-line depreciation is used for both financial reporting purposes and tax purposes, but the assets鈥� lives are shorter for tax purposes. (g) ______ Interest is received on an investment in tax-exempt municipal obligations. (h) ______ Proceeds are received from a life insurance company because of the death of a key officer. (The company carries a policy on key officers.) (i) ______ The tax return reports a deduction for 80% of the dividends received from U.S. corporations. The cost method is used in accounting for the related investments for financial reporting purposes. (j) ______ Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled. (k) ______ Expenses on stock options are accrued for financial reporting purposes.

Using the information from BE19-2, assume this is the only difference between Oxford鈥檚 pretax financial income and taxable income. Prepare the journal entry to record the income tax expense, deferred income taxes, and income taxes payable, and show how the deferred tax liability will be classified on the December 31, 2017, balance sheet.

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.)

SpamelaHamderson Inc. reports the following pretax income (loss) for both financial reporting purposes and tax purposes. (Assume the carryback provision is used for a net operating loss.) Income (Loss) Tax Rate 2009 \( 29,000 30% 2010 40,000 30 2011 17,000 35 2012 48,000 50 2013 (150,000) 40 2014 90,000 40 2015 30,000 40 2016 105,000 40 2017 (60,000) 45 Year Pretax Income (Loss) Tax Rate 2015 \)120,000 34% 2016 90,000 34 2017 (280,000) 38 2018 220,000 38 The tax rates listed were all enacted by the beginning of 2015. Instructions (a) Prepare the journal entries for the years 2015鈥�2018 to record income tax expense (benefit) and income taxes payable (refundable) and the tax effects of the loss carryback and carryforward, assuming that at the end of 2017 the benefits of the loss carryforward are judged more likely than not to be realized in the future. (b) Using the assumption in (a), prepare the income tax section of the 2017 income statement beginning with the line 鈥淥perating loss before income taxes.鈥� (c) Prepare the journal entries for 2017 and 2018, assuming that based on the weight of available evidence, it is more likely than not that one-fourth of the benefits of the loss carryforward will not be realized. (d) Using the assumption in (c), prepare the income tax section of the 2017 income statement beginning with the line 鈥淥perating loss before income taxes.鈥�

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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