Problem 1-Income Taxes The following information is available for Hamilton Corpo

Question

Problem 1-Income Taxes The following information is available for Hamilton Corporation for 2018 1. Depreciation reported on the tax return exceeded depreciation reported on the income statement by $195,000. The differences will reverse equally over the years 2019-2021. Annual interest received on municipal bonds was $21,000 Rent collected in advance on January 1, 2018, totaled $120,000 for a 3-year period. Of this amount, $80,000 was reported as unearned revenue at December 31, 2018, for book purposes. During 2018, Hamilton paid $35,000 for a life insurance policy on its executives, with Hamilton as the beneficiary. The tax rates are 40% for 2018 and 2019, and 35% for 2020 and beyond Pretax financial income for the years ended December 31, 2018 was $7,125,000. 2. 3. 4. 5. 6. Instructions (a) Assuming no other differences between book and taxable incomes existed, except for those mentioned above, prepare the journal entries to record Income Tax Expense, Deferred Income Taxes, and Income Taxes Payable for 2018. (b) How are the DTLs and DTAs present on the balance sheet? Break out the amounts by current & long-term.

Explanation / Answer

a)Calculation of income tax payable

Income tax liability for December 31 2018

Income tax as per books of account 2,809,600.00

Less difference in tax payable due to the difference in depreciation amount -78,000.00

(195000*40%)

Total tax payable for 2018

2,731,600.00

Journal Entry

Income Tax Expenses Dr $2,809,600.00

Deffered Tax liablility Cr $78,000

Income Tax Payable Cr $ 2,731,600.00

  

b)DTL will have to show under the liability side of the balance sheet as long term or short term liablilities

DTA will have to show under the asset side of the balance sheet as long term or short term assets   

Balance Sheet as on December 31st 2018

Deffered tax liability:

Short Term $26,000.00 (78000/3)

Long Term $52,000.00 (26,000*2)

Note: Life insurance on executes is a taxable expense for the company

Amount $ Pre tax financial income for the years ended December 31 2018 7,125,000.00 Less Unearned income   -80,000.00 Less Interest received on muncipal bonds -21,000.00 Total taxable income 7,024,000.00 Income tax @ 40% 2,809,600.00

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