Johnny Bravo Company began operations in 2015 and has provided the following inf
ID: 2491813 • Letter: J
Question
Johnny Bravo Company began operations in 2015 and has provided the following information.
Pretax financial income for 2015 is $100,000.
The tax rate enacted for 2015 and future years is 40%.
Differences between the 2015 income statement and tax return are listed below.
Warranty expense accrued for financial reporting purposes amounts to $5,000. Warranty deductions per the tax return amount to $2,000.
Gross profit on construction contracts using the percentage-of-completion method for book purposes amounts to $92,000. Gross profit on construction contracts for tax purposes amounts to $62,000.
Depreciation of property, plant, and equipment for financial reporting purposes amounts to $60,000.
Depreciation of these assets amounts to $80,000 for the tax return.
A $3,500 fine paid for violation of pollution laws was deducted in computing pretax financial income.
Interest revenue earned on an investment in tax-exempt municipal bonds amounts to $1,400.
Taxable income is expected for the next few years.
1. prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2015.
2. Draft the income tax expense section of the income statement, beginning with “Income before income taxes”
Explanation / Answer
Solution:
Calculation of Taxable income:
Calculation of Deferred Taxes:
Because of flat tax rate, these totals can be reconciled: 47,000 * 40% = (1,200) + 20,000.
Journal entry to record income tax expense, deferred taxes, and income taxes payable for 2015:
Income tax expense section of the income statement:
Pretax financial income 100,000 Permanent differences: Fine for pollution 3,500 Tax-exempt interest (1,400) Originating temporary differences: Excess warranty expense per books (5,000 - 2,000) 3,000 Excess construction profits per books (92,000 - 62,000) (30,000) Excess depreciation per tax return (80,000 - 60,000) (20,000) Taxable income 55,100Related Questions
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