Company Y had book income of $600,000. The following items were identified: 1. I

Question

Company Y had book income of $600,000. The following items were identified:

1. Income from PA Municiple Bonds: 10,000

2. Excess Depreciation Expense: 60,000

3. Officers Life Insurance Expense: 5,000

4. Bad Debt Provision (Expense): 7,000 (no- charge offs this year)

5. Warranty Reserve (Expense): 12,000 (no claims this year)

6. Meals and Entertainment Expense: 20,000 (100% of expenses)

Company Y's tax rate is 40%

Beginning of the year, cumulative temporary difference is computed as follows:

Book Accumulated Depreciation: 110,000

Tax Accumulated Depreciation: 150,000

Cumulative Difference in PP&E: 40,000

Cumulative Difference in Accounts Receuvable Provision: 20,000

Cumulative Difference in Warranty Reseve: 80,000

Calculate the current Federal Income tax provision (expense/benefit)

Prepare the adjusting journal entry to record the Federal Income tax provision

Explanation / Answer

Book Income $600,000 Less: Income from PA municipal bonds ($10,000) Add: Excess Depreciation expense $60,000 Bad debt provision $7,000 Warranty reserve $12,000 Officers life insurance expense $5,000 $84,000 Taxable income $674,000 Current Federal income tax provision Deferred tax asset = (60000+7000+12000) x 40% = 31600 Income tax payable = taxable income x tax rate                                          = 674000 x 40% =269600 Journal entry Income tax expense $238,000 Deferred tax asset $31,600 Income tax payable $269,600

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