Problem 1 A reconciliation of Sauder Company’s pretax accounting income with its
ID: 2565601 • 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
(a) compute the total deferred tax liability (net of tax rate changes) to be reported on Sauder’s balance sheet at December 31, 2014.
(b) 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
Sauder Company (a) Total deferred tax liability net of tax rate changes) to be reported in balance sheet as at December 31, 2014 Tax rate $ Pre-tax taxable income Excess tax depreciation 240000 2013 - 2014 8000000 Permanent differences (death benefit) 260000 2014 -2015 8800000 40.00% Deferred tax liability 500000 2015-2016 9680000 35.00% 2016 -2017 10648000 30.00% (b) Jorunal entries $ $ Tax 31-Dec-14 Debit Deferred tax 500000 2014 -2015 3520000 Credit Income tax expense 500000 2015-2016 3388000 2016 -2017 3194400 (Provision for deferred tax Excess tax Depreciation $240000 Permanent differences (death benefit) $260000) Depreciation(net taxable) 240000 2014 -2015 80000 31-Dec-15 Debit Incometax expense 3520000 2015-2016 80000 Credit Deferred tax 420000 2016 -2017 80000 Tax Liability 3100000 Death duties (Recording tax expense and adjustment of provision for deferred tax) Amount credited to Deferred tax 500000 260000 2014 -2015 86667 31-Dec-16 Debit Incometax expense 3388000 2015-2016 86667 Credit Deferred tax 166667 2016 -2017 86667 Tax Liability 3221333 260000 (Recording tax expense and adjustment of provision for deferred tax) 31-Dec-17 Debit Incometax expense 3194400 Credit Deferred tax 166667 Tax Liability 3027733 (Recording tax expense and adjustment of provision for deferred tax)
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