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Intermediate Accounting (Kieso)
Found in: Page 1105

Short Answer

The following information was disclosed during the audit of Elbert Inc. 1. Amount Due Year per Tax Return 2017 $130,000 2018 104,000 2. On January 1, 2017, equipment costing $600,000 is purchased. For financial reporting purposes, the company uses straight-line depreciation over a 5-year life. For tax purposes, the company uses the elective straight-line method over a 5-year life. (Hint: For tax purposes, the half-year convention as discussed in Appendix 11A must be used.) 3. In January 2018, $225,000 is collected in advance rental of a building for a 3-year period. The entire $225,000 is reported as taxable income in 2018, but $150,000 of the $225,000 is reported as unearned revenue in 2018 for financial reporting purposes. The remaining amount of unearned revenue is to be recognized equally in 2019 and 2020. 4. The tax rate is 40% in 2017 and all subsequent periods. (Hint: To find taxable income in 2017 and 2018, the related income taxes payable amounts will have to be “grossed up.”) 5. No temporary differences existed at the end of 2016. Elbert expects to report taxable income in each of the next 5 years. Instructions (a) Determine the amount to report for deferred income taxes at the end of 2017, and indicate how it should be classified on the balance sheet. (b) Prepare the journal entry to record income taxes for 2017. (c) Draft the income tax section of the income statement for 2017, beginning with “Income before income taxes.” (Hint: You must compute taxable income and then combine that with changes in cumulative temporary differences to arrive at pretax financial income.) (d) Determine the deferred income taxes at the end of 2018, and indicate how they should be classified on the balance sheet. (e) Prepare the journal entry to record income taxes for 2018. (f) Draft the income tax section of the income statement for 2018, beginning with “Income before income taxes.”

An organization's purchase of equipment is recorded in its subsequent books. If the purchase is made in cash, the relevant cash is deducted from the current assets; on the other hand, the cost of equipment is added to the non-current assets.

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Step by Step Solution

(a) Computation of deferred income tax

Temporary difference

Taxable amount

Tax rate

Deferred tax asset

Deferred tax liability

Depreciation

($60,000)

40%

($24,000)

Working notes

Year

Book depreciation

Tax depreciation

Difference

2017

$120,000

$60,000

$60,000

2018

$120,000

$120,000

2019

$120,000

$120,000

2020

$120,000

$120,000

2021

$120,000

$120,000

2022

$60,000

($60,000)

Total

$600,000

$600,000

$0

(b) Journal Entry

Elbert Inc.
Journal Entry

Date

Particulars

Debit

Credit

2017

Income tax expense

$116,000

Deferred tax asset

$24,000

Income tax payable

$140,000

(To record the income tax expense)

(c) Income statement

Elbert Inc.
Income Statement

Particulars

Amount

Income before income taxes

$310,000

Less: Income tax expense

Current

$140,000

Deferred

($24,000)

$116,000

Net Income

$194,000

(d) Determination of deferred income tax

Temporary difference

Taxable amount

Tax Rate

Deferred tax asset

Deferred tax liability

Classification in balance sheet

Depreciation

($60,000)

40%

($24,000)

Non-current assets

Unearned rent

($150,000)

40%

($60,000)

Current assets

Unearned rent

($150,000)

40%

($60,000)

Non-current assets

Total

($360,000)

($144,000)

(e) Preparation of journal entry

Elbert Inc.
Journal Entry

Date

Particulars

Debit

Credit

2018

Income tax expense

$224,000

Deferred tax asset

$120,000

Income tax payable

$104,000

(To record the deferred tax asset)

(f) Income tax section under income statement

Elbert Inc.
Income Statement

Particulars

Amount

Income before income taxes

$260,000

Less: Income tax expense

Current

$104,000

Deferred

$120,000

Net Income

$36,000

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