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.
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.
Pretax financial income
Add: Insurance expense
Less: Bond interest revenue
Add: Pollution fines
Less: Depreciation expense
Less: Installment sales
Add: Warranty expense
Income tax expense
Deferred tax asset
Deferred tax liability
Income tax payable
(To record the income tax expense)
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.
Bandung Corporation began 2017 with a $92,000 balance in the Deferred Tax Liability account. At the end of 2017, the related cumulative temporary difference amounts to $350,000, and it will reverse evenly over the next 2 years. Pretax accounting income for 2017 is $525,000, the tax rate for all years is 40%, and taxable income for 2017 is $405,000. Instructions (a) Compute income taxes payable for 2017. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017. (c) Prepare the income tax expense section of the income statement for 2017 beginning with the line “Income before income taxes.”
Dexter Company appropriately uses the asset-liability method to record deferred income taxes. Dexter reports depreciation expense for certain machinery purchased this year using the modified accelerated cost recovery system (MACRS) for income tax purposes and the straight-line basis for financial reporting purposes. The tax deduction is the larger amount this year. Dexter received rent revenues in advance this year. These revenues are included in this year’s taxable income. However, for financial reporting purposes, these revenues are reported as unearned revenues, a current liability. Instructions (b) How would Dexter account for the temporary differences?
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