WFO Inc. generated pretax financial income of $8,300,000 for the year ended 12/3

Question

WFO Inc. generated pretax financial income of $8,300,000 for the year ended 12/31/11. WFO's income tax rate is 35%. The Company's controller has identified the following book / tax differences relevant to 12/31/11 and the year then ended At the beginning of 2011, WFO invested in bonds issued by various state and municipal governments and accounts for these investments as available for sale. WFO earned and collected $210,000 in interest income from these bond investments during the year . . On 1/1/11, WFO purchased 8 heavy-duty work trucks for $360,000 and immediately started using the vehicles in its operation. For book purposes, WFO depreciates the vehicles using a straight-line method with an estimated 6-year useful life and zero estimated salvage value. For tax purposes, WFO was able to fully depreciate deduct the entire $360,000 cost in 2011 WFO provides a 1-year warranty policy on its products and reported a $720,000 warranty payable at 12/31/10. During 2011, WFO paid $858,000 in actual warranty claims and . recognized warranty expense of $909,000 as its estimate of probable claims on 2011 sales. For tax purposes, warranty claims are not deductible until actually paid. WFO reported a $252,000 DTA at 12/31/10 related to this book / tax difference Prepare the necessary journal entry to record income tax expense and to adjust the related balance sheet accounts as of 12/31/11

Explanation / Answer

Reconciliation of pretax financial income to taxable finacial income Pretax financial income $8,300,000 Less: Tax exempted interest income ($210,000) Less: Full depreciation of trucks ($300,000) ($60000 already expensed out from pretax financial income) Add: Warranty expense for 2011 (estimated) $909,000 Taxable income $8,699,000 Journal entry for income tax expenses Income tax expense $2,831,500 Deferred tax expenses $318,150 Deferred tax liability $105,000 Income tax payable $3,044,650 Working Notes: Current tax payable = Taxable income x tax rate                                           = $8699000 x 35%                                          = $3044650 Deferred tax assets = Warranty expenses x tax rate                                          = $909000 x 35%                                          = $318150 Ending deferred tax asset - Beginning tax asset = Change in deferred tax asset $318150-$252000 = $66150 Deferred Tax liability = $300000 x 35%                                              = $105,000

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.