The records for Phinn Co. show this data for 2014: Gross profit on installment s

Question

The records for Phinn Co. show this data for 2014:

Gross profit on installment sales recorded on the books was $360,000. Gross profit for tax purposes from collections of installment receivables was $270,000.

Machinery was acquired in January for $300,000. Straight-line depreciation over a ten-year life (no residual value) is used. For tax purposes, Accelerated depreciation is used and Phinn may deduct 20% for 2014.

Interest received on governmental obligations was $9,000.

The estimated warranty liability related to 2014 sales was $19,600. Repair costs under warranties during 2011 were $13,600. The remainder will be incurred in 2015.

Pretax financial income is $600,000. The tax rate is 30%.

Instructions

(a)      Prepare a schedule starting with pretax financial income and compute taxable

income.

(b)      Prepare the journal entry to record income taxes for 2014.

Explanation / Answer

Answer a. Schedule of Pretax Finacial Income & Taxable Income of 2014 Particulars Amount Pretax Finacial Income           600,000 Permanent Difference Interest Recd on Govermental Obligations              (9,000) Temporary Difference Depreciation expenses          (30,000) Difference of gross profit of Installment Sales          (90,000) (270000-360000) Warranty liability (19600-13600)              6,000         (114,000) Taxable Income           477,000 Deprecaition expenses As per Straight Line Method            30,000 As per Accelerated dep. Method            60,000 Difference          (30,000) Answer b. Income Tax payable for 2014 Taxable Income          477,000 Tax Rate 30% Income Tax Payable 143100 Calculation of Deferred income taxes for 2014 Depreciation Expense - $(30000) X 30% -9000 Deffered Tax Liability Gross Profit on Insatllment Sales - $(90000) X 30% -27000 Deffered Tax Liability Warranty Expenses - $6000 X 30% 1800 Deffered Tax Asset Calulation of I Tax Expenses for 2014 Income Tax payable          143,100 Less: Deffered tax Assets            (1,800) Add: Deffered tax Liability (9000 +27000)            36,000 Inome Tax Expense for 2014          177,300 Journal Entry of I Tax Patyable is: Income Tax expense                                                 Dr. 177300 Deferred Tax asset                                                    Dr. 1800        To Deffered Tax liability 36000        To Inome Tax Payable 143100

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