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Q4P.

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Intermediate Accounting (Kieso)
Found in: Page 1103

Short Answer

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.

See the step by step solution

Step by Step Solution

(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

$150,000

Less: Installment sales

$25,000

Add: Warranty expense

$40,000

Taxable income

$624,200

(b) Journal entry

Date

Particulars

Debit

Credit

2017

Income tax expense

$188,760

Deferred tax asset

$ 12,000

Deferred tax liability

$13,500

Income tax payable

$187,260

(To record the income tax expense)

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