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Q3P.

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Intermediate Accounting (Kieso)
Found in: Page 1103

Short Answer

The following information has been obtained for Gocker Corporation.

1. Prior to 2017, taxable income and pretax financial income were identical.

2. Pretax financial income is $1,700,000 in 2017 and $1,400,000 in 2018.

3. On January 1, 2017, equipment costing $1,200,000 is purchased. It is to be depreciated on a straight-line basis over 5 years for tax purposes and over 8 years for financial reporting purposes. (Hint: Use the half-year convention for tax purposes, as discussed in Appendix 11A.)

4. Interest of $60,000 was earned on tax-exempt municipal obligations in 2018.

5. Included in 2018 pretax financial income is a gain on discontinued operations of $200,000, which is fully taxable.

6. The tax rate is 35% for all periods.

7. Taxable income is expected in all future years.

Instructions (a) Compute taxable income and income taxes payable for 2018. (b) Prepare the journal entry to record 2018 income tax expense, income taxes payable, and deferred taxes. (c) Prepare the bottom portion of Gocker’s 2018 income statement, beginning with “Income from continuing operations before income taxes.” (d) Indicate how deferred income taxes should be presented on the December 31, 2018, balance sheet.

Straight-line depreciation is a type of depreciation method where the amount of depreciation applies to an asset's original cost for its total life expectancy.

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Step by Step Solution

Working notes

Year

Book depreciation

Tax depreciation

Difference

Cumulative difference

After tax @35%

2017

$150,000

$120,000

$30,000

$30,000

$10,500

2018

$150,000

$240,000

-$90,000

-$60,000

-$21,000

2019

$150,000

$240,000

-$90,000

$150,000

-$52,500

2020

$150,000

$240,000

-$90,000

-$240,000

-$84,000

2021

$150,000

$240,000

-$90,000

-$330,000

-$115,500

2022

$150,000

$120,000

$30,000

-$300,000

-$105,000

2023

$150,000

$150,000

-$150,000

-$52,500

2024

$150,000

$150,000

Total

$1,200,000

$1,200,000

(a) Computation of the taxable income and taxes payable

Particulars

Amount

Pretax financial income

$1,400,000

Less: Nontaxable interest

$60,000

Less: Excess depreciation

$90,000

Taxable income for 2018

$1,250,000

Multiply: Tax rate

35%

Income tax payable

$437,500

(b) Journal entry

Date

Particulars

Debit

Credit

2018

Income tax expense

$469,000

Income tax payable

$437,500

Deferred tax liability

$21,000

Deferred tax asset

$10,500

(To record the tax expense)

(c) Preparation of the income statement

Income Statement

Particulars

Amount

Income before income taxes and extraordinary item

$1,200,000

Less: Income tax expense

Current

$367,500

Deferred

$31,500

$399,000

Income before extraordinary item

801,000

Add: Extraordinary gain

$200,000

Less: Income tax

$70,000

$130,000

Net Income

$931,000

(d) Indication of the amounts

The deferred tax liability of $17,500 will be reported under the liabilities section under the head long-term liabilities.

Most popular questions for Business-studies Textbooks

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’ 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.

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