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Q20E.

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 1100

Short Answer

The differences between the book basis and tax basis of the assets and liabilities of Castle Corporation at the end of 2016 are presented below. Book Basis Tax Basis Accounts receivable $50,000 $–0– Litigation liability 30,000 –0– It is estimated that the litigation liability will be settled in 2017. The difference in accounts receivable will result in taxable amounts of $30,000 in 2017 and $20,000 in 2018. The company has taxable income of $350,000 in 2016 and is expected to have taxable income in each of the following 2 years. Its enacted tax rate is 34% for all years. This is the company’s first year of operations. The operating cycle of the business is 2 years. Instructions (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016. (b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2016.

The journal entry in the above question will be passed using the amount of accounts receivable and the litigation liability as deferred tax asset and liability with its respective income tax rates.

See the step by step solution

Step by Step Solution

(a) Passing of the journal entry

Date

Particulars

Debit

Credit

2016

Income tax expense

125,800

Deferred tax asset

$10,200

Income tax payable

$119,000

Deferred tax liability

$17,000

(To record the tax expense)

(b) indication of the amounts

Balance Sheet

Liabilities

Amount

Long-term liabilities

Net deferred tax liability

$6,800

Current liabilities

Income tax payable

$119,000

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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.”

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