Taxable income and pretax financial income would be identical for Sunland Co. ex

Question

Taxable income and pretax financial income would be identical for Sunland Co. except for its treatments of gross profit on installment sales and estimated costs of warranties. The following income computations have been prepared Taxable income 2016 2017 2018 Excess of revenues over expenses (excluding two temporary differences) Installment gross profit collected Expenditures for warranties $151,000 $207,000 $96,200 7,300 7,300 7,300 (5,200) (5,200) (5,200) Taxable income $153,100 $209,100 $98,300 Pretax financial income 2016 2017 2018 Excess of revenues over expenses (excluding two temporary differences) Installment gross profit recognized Estimated cost of warranties $151,000 $207,000 $96,200 21,900 0 0 (15,600) 0 0 Income before taxes $157,300 $207,000 $96,200 The tax rates in effect are 2016, 4090; 2017 and 2018, 45%. All tax rates were enacted into law on January 1, 2016, No deferred income taxes existed at the beginning of 2016. Taxable income is expected in all future years

Explanation / Answer

The temporary difference is deferred tax liability, if taxable income is less than the financial income. You paid less tax today and have to pay more tax in the future.

Considering the situation, 2016

The following would be the entry (all amounts are in $ unless otherwise mentioned)

  

Computation of Deferred tax liability

Year 2017

In the subsequent year there will be no temporary difference in an ideal scenario and this DTL of 945 will be reduced to Zero and Income tax expense will be credit to the extent of 945.

Year Account head Debit Credit Narration 2016 Income tax expense 62920 For creation of Tax payable and DTL 2016 Deferred tax liability 1680 For DTL created 2016 Income tax payable 61240 For income tax payable based on Tax income (153100 * 40%)

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