P19-8 (LOI,2,4) (Two Differences, 2 Years, Compute tion was disclosed during the
ID: 2584324 • Letter: P
Question
P19-8 (LOI,2,4) (Two Differences, 2 Years, Compute tion was disclosed during the audit of Elbert Inc. Taxable Income and Pretax Financial Income) The following informa an I. Amount Due Yearper Tax Return 2017 2018 $130,000 104,000 uses straight anuary 1,2017, equipment costing $600,000 is purchased. For financial reporting purposes, the line depreciation over a 5-year life. (Hint: F or tax purposes, the company uses the elective straight-line method over a 5-year life. the companyss or tax purposes, the half-year convention as discussed in Appendix 11A must be used.) 3. In January 2018, $225,000 is collected in advance rental of a building for a 3-year period. The entire $225,000 is taxable income in 2018, but $150,000 of the $225,000 is reported as unearned revenue in 2018 for financial reporting Pu poses. The remaining amount of unearned revenue is to be recognized equally in 2019 and 2020. The tax rate is 40% in 2017 andall subsequent periods. (Hint Tofind taxable income in 2017 and 2018, the related income 4. 5. No temporary differences existed at the end of 2016. Elbert expects to report taxable income in each of the next 5 yeans. (a) Determine the amount to report for deferred income taxes at the end of 2017, and indicate how it should be classified (b) Prepare the journal entry to record income taxes for 2017. taxes payable amounts will have to be "grossed up.") Instructions on the balance sheet. (c) Draft the income tax section of the income statement for 2017, beginning with "Income before income taxes." (Hint: You must compute taxable income and then combine that with changes in cumulative temporary differences to arrive at pretax financial income.) (d) Determine the deferred income taxes at the end of 2018, and indicate how they should be classified on the balance sheet. (e) Prepare the journal entry to record income taxes for 2018. (n Draft the income tax section of the income statement for 2018, beginning with "Income before income taxes."Explanation / Answer
(a) For 2017 there are no temporary or permanent difference hence there will be no deferred income taxes. Because as per equipment purchased there is no difference between depreciation as per tax and depreciation as per financial reporting. And for advance rental received deferred tax will arise from 2018 and not for 2017.
(b) Journal entry
......Income Tax Payable A/c.......Debit.............$130,000
......To Cash a/c .........................Credit............$130,000
(To record income tax payment)
(c) Amount due as per tax return = $130,000 / 40%
.....................................................= $325,000
(d)
In Balance sheet deferred tax asset will be shown amounting $30,000 on the asset side.
(e) Journal Entry
Income tax expense A/c Debit.............$74,000
Deferred Tax Asset A/c Debit ..............$30,000
To Income tax payable A/c Credit........$104,000
(To record income tax payment)
(f)
Amount due as per tax return = $104,000 / 40%
................................................= $260,000
Income Statement 2017 Income before income taxes $325,000 Temporary differences $0 Total Income $325,000 Tax rate 40% Income tax expense $130,000Related Questions
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