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Molnar Corporation reported the following results for Year 1, its first year in

ID: 2470155 • Letter: M

Question

Molnar Corporation reported the following results for Year 1, its first year in business:

                        Taxable income (all taxable at 34%) . . . . . . . . . . . . . . $300,000

                        Accounting income (income before taxes). . . . . . . . . . $400,000

The difference between taxable income and accounting income resulted from the following:

         REQUIRED:

1. Reconcile income before taxes to taxable income.

2. Prepare the journal entry to record the taxes for Year 1 assuming the following turnaround on temporary differences and a 34% tax rate for years 2-3 and 40% for years 4-5:

3. Classify the deferred taxes for balance sheet purposes assuming installment sale receivables are classified as a current asset and product warranty is a long-term liability.

Income Statement Income Tax Return Depreciation $100,000 $150,000 Profit on installment sales 135,000 55,000 Product warranty expense 30,000 -0-

Explanation / Answer

Molnar Corporation             1 Details Amt $ Accounting income                    400,000 Less: Income on installment sales recognized on receipt basiss                    (80,000) Less : Additional depreciation in Tax basis                    (50,000) Add:Product warranty expense non deductible in Taxable income unless paid                      30,000 Taxable Income                    300,000             2 As per UGAAP the enacted rate is considered for   Deferred tax , so 34% is being considered thorughout Journal Entry Account Title Dr $ Cr $ Income Tax Expense                    136,000 Income Tax Payable              102,000 Deferred Tax Liability              44,200 Deferred Tax Asset                      10,200             3 Deferred Tax classification Temp Difference Current Non Cuurent   Deferred Tax Liability-Depreciation=                         5,100              11,900 Deferred Tax liability - Installment sale                      27,200 Deferred Tax Asset -Warranty Expense              10,200

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