P19-4 (Permanent and Temporary Differences, One Rate) The ...



P19-4 (Permanent and Temporary Differences, One Rate) The accounting records of Shinault Inc. Show the following data for 2010 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 2010. Actual repair and labor costs related to the warranties in 2010 were $10,000. The remainder is estimated to be paid evenly in 2011 and 2012 5. Sales on an accrual basis were $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 fnancial income was $750,000. The tax rate is 30% Instructions: (a) Prepare a schedule starting with pretax financial income in 2010 and ending with taxable income in 2010 (b) Prepare the journal entry for 2010 to record income tax payable, income tax expense, and deferred income taxes.

(a) Schedule of Pretax Financial Income

and Taxable Income for 2010

Pretax financial income $750,000

Permanent differences

Insurance expense 9,000

Bond interest revenue (4,000)

Pollution fines 4,200

759,200

Temporary differences

Depreciation expense (30,000) *

Installment sales ($100,000 – $75,000) (25,000)

Warranty expense ($50,000 – $10,000) 40,000

Taxable income $744,200

* Depreciation for books ($300,000/5) = $60,000

Depreciation tax return ($300,000 X 30%) = 90,000

Difference $30,000

The income tax payable for 2010 is as follows:

Taxable income $744,200

Tax rate 30%

Income tax payable $223,260

The computation of the deferred income taxes for 2010 is as follows:

Temporary differences

Depreciation expense $(30,000) X 30% = $(9,000) DTL

Installment sales ($100,000 – $75,000) (25,000) X 30% = (7,500) DTL

Warranty expense ($50,000 – $10,000) 40,000 X 30% = 12,000 DTA

(b) The journal entry to record income tax payable, income tax expense and deferred income taxes is as follows:

Income Tax Expense 227,760*

Deferred Tax Asset 12,000

Deferred Tax Liability ($9,000 + $7,500) 16,500

Income Tax Payable 223,260

*Deferred tax expense for 2010

(from deferred tax liability) ($9,000 + $7,500) $ 16,500

Deferred tax benefit for 2010

(from deferred tax asset) (12,000)

Net deferred tax expense for 2010 4,500

Current tax expense for 2010

(income tax payable) 223,260

Income tax expense for 2010 $227,760

P19-9 Wise Company began operations at the beginning of 2011. the following information pertains to this company. 1. Pretax financial income for 2011 is $100.000 2. The tax rate enacted for 2011 and future years is 40% 3. Differences between the 2011 income statement and tax return are listed below: a. Warranty expense accrued for financial reporting purposes amounts to $7,000. Warranty deductions per the tax return amount to $2000. b. Gross profit on construction contracts using the percentage-of-completion method per books amounts to $92000. Gross profit on construction contracts for tax purposes amounts to $67000. c. Depreciation of property, plant, and equipment for financial reporting purposes amounts to $60000. Depreciation of these assets amounts to $80000 for the tax return. d. A $3500 fine paid for violation of pollution laws was deducted in computing pretax financial income. e. Interest revenue earned on an investment in tax-exempt municipal bonds amounts to $1500. (Assume (a) is short-term in nature; assume (b) and (c) are long-term in nature). 4. Taxable income is expected for the next few years. Instruction: a. Compute taxable income for 2011. b. Compute the deferred taxes at December 31, 2011, that relate to the temporary differences describet above. Clearly label them as deferred tax asset or liability. c. Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2011. d. Draft the income tax expense section of the income statement begining with " Income before income taxes."

(a) Pretax financial income $100,000

Permanent differences:

Fine for pollution 3,500

Tax-exempt interest (1,500)

Originating temporary differences:

Excess warranty expense per books

($7,000 – $2,000) 5,000

Excess construction profits per books

($92,000 – $67,000) (25,000)

Excess depreciation per tax return

($80,000 – $60,000) (20,000)

Taxable income $ 62,000

(b)

|Temporary |Future Taxable (Deductible) Amounts |Tax Rate |Deferred Tax |

|Difference | | | |

| | | |(Asset) |Liability |

|Warranty costs |$ (5,000) |40% |$(2,000) | |

|Construction profits |25,000 |40% | |$10,000 |

|Depreciation |( 20,000 |40% |             |* 8,000 |

| Totals |($40,000 | |$(2,000) |*$18,000* |

*Because of a flat tax rate, these totals can be reconciled: $40,000 X 40% = $(2,000) + $18,000.

(c) Income Tax Expense 40,800

Deferred Tax Asset 2,000

Deferred Tax Liability 18,000

Income Tax Payable 24,800

Taxable income for 2011 [answer part (a)] $62,000

Tax rate 40%

Income tax payable for 2011 $24,800

Deferred tax liability at the end of 2011 [part (b)] $18,000

Deferred tax liability at the beginning of 2011 0

Deferred tax expense for 2011 $18,000

Deferred tax asset at the end of 2011 $ 2,000

Deferred tax asset at the beginning of 2011 0

Deferred tax benefit for 2011 $ (2,000)

Deferred tax expense for 2011 $18,000

Deferred tax benefit for 2011 (2,000)

Net deferred tax expense for 2011 $16,000

Current tax expense for 2011 (Income tax payable) $24,800

Deferred tax expense for 2011 16,000

Income tax expense for 2011 $40,800

(d) Income before income taxes $100,000

Income tax expense

Current $24,800

Deferred 16,000 40,800 Net income $ 59,200

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