Problem 1 A reconciliation of Sauder Company’s pretax accounting income with its
ID: 2565395 • Letter: P
Question
Problem 1
A reconciliation of Sauder Company’s pretax accounting income with its taxable income for 2014. Its first year of operations is as follows
Pretax accounting income is $8,000,000
Less: Excess tax depreciation of (240,000)
Less: Permanent diffrences (death benefit) of (260,000)
Equal: Taxable income of $7,500,000
The excess tax depreciationwill result in equal net taxable amounts in cash of the next three years. Pretax accounting income increase by 10% in each year after 2014. Enacted tax rates are 40% in 2014 then 35% in 2015 and 30% in 2016 and 2017.
Required
compute the total deferred tax liability (net of tax rate changes) to be reported on Sauder’s balance sheet at December 31, 2014.
Create the journal entries required at 12/31/14, and 12/31/15 and 12/31/16 and 12/31/17 to record tax expense and tax payable.
Explanation / Answer
(a)
2014
2015
2016
2017
Total
-240,000
80,000
80,000
80,000
0
Tax Rate
0.4
0.35
0.35
0.3
DTL
28,000
28,000
24,000
80,000
(80000 x 35%)
(80000 x 35%)
(80000 x 30%)
(28000+28000+24000)
7,760,000
Tax Payable
3,104,000
(7760000 x 40%)
(b)
Journal Entry
Dr.
Cr.
Tax Expense
3,184,000
Taxes Payable
3,104,000
Deferred Tax Liability
80,000
Explanation: Since there is only one item that is excess tax depreciation i.e. for tax purposes 240,000 of depreciation
is deducted from income for current year so this year tax will decrease by that amount(240000 x 40%) but for accounting
Purposes it will be deducted straight line for next three years. Since we already have taken benefits of this depreciation
In year 2014 for subsequent year 2015, 2016 and 2017 we have to pay extra tax on this amount.
Year 2015 rate is 35% so taxable income will be excess by 80,000 and tax on that 80000 will be paid that is 28000
same for 2016 and 2017 happens so we recognize deferred tax liability of $80,000 in year 2014 that will be paid in year
2015, 2016,and 2017.
(a)
2014
2015
2016
2017
Total
-240,000
80,000
80,000
80,000
0
Tax Rate
0.4
0.35
0.35
0.3
DTL
28,000
28,000
24,000
80,000
(80000 x 35%)
(80000 x 35%)
(80000 x 30%)
(28000+28000+24000)
7,760,000
Tax Payable
3,104,000
(7760000 x 40%)
(b)
Journal Entry
Dr.
Cr.
Tax Expense
3,184,000
Taxes Payable
3,104,000
Deferred Tax Liability
80,000
Explanation: Since there is only one item that is excess tax depreciation i.e. for tax purposes 240,000 of depreciation
is deducted from income for current year so this year tax will decrease by that amount(240000 x 40%) but for accounting
Purposes it will be deducted straight line for next three years. Since we already have taken benefits of this depreciation
In year 2014 for subsequent year 2015, 2016 and 2017 we have to pay extra tax on this amount.
Year 2015 rate is 35% so taxable income will be excess by 80,000 and tax on that 80000 will be paid that is 28000
same for 2016 and 2017 happens so we recognize deferred tax liability of $80,000 in year 2014 that will be paid in year
2015, 2016,and 2017.
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