P19-4 (Permanent and Temporary Differences, One Rate) The accounting records of Shinault Inc. Show the following data for 2010 1. Life insurance expense on officers was $9,000 2. Equipment was acquired in early January for $300,000. Straight-line depreciation over a 5-year life is used, with no salvage value. For tax purposes, Shinault used a 30% rate to calculate depreciation 3. Interest revenue on State of New York bonds totaled $4,000 4. Product warranties were estimated to be $50,000 in 2010. Actual repair and labor costs related to the warranties in 2010 were $10,000. The remainder is estimated to be paid evenly in 2011 and 2012 5. Sales on an accrual basis were $100,000. For tax purposes, $75,000 was recorded on the installment-Sales method 6. Fines incurred for pollution violations were $4,200 7. Pretax fnancial income was $750,000. The tax rate is 30% Instructions: (a) Prepare a schedule starting with pretax financial income in 2010 and ending with taxable income in 2010 (b) Prepare the journal entry for 2010 to record income tax payable, income tax expense, and deferred income taxes.
(a) Schedule of Pretax Financial Income
and Taxable Income for 2010
Pretax financial income $750,000
Permanent differences
Insurance expense 9,000
Bond interest revenue (4,000)
Pollution fines 4,200
759,200
Temporary differences
Depreciation expense (30,000) *
Installment sales ($100,000 – $75,000) (25,000)
Warranty expense ($50,000 – $10,000) 40,000
Taxable income $744,200
* Depreciation for books ($300,000/5) = $60,000
Depreciation tax return ($300,000 X 30%) = 90,000
Difference $30,000
The income tax payable for 2010 is as follows:
Taxable income $744,200
Tax rate 30%
Income tax payable $223,260
The computation of the deferred income taxes for 2010 is as follows:
Temporary differences
Depreciation expense $(30,000) X 30% = $(9,000) DTL
Installment sales ($100,000 – $75,000) (25,000) X 30% = (7,500) DTL
Warranty expense ($50,000 – $10,000) 40,000 X 30% = 12,000 DTA
(b) The journal entry to record income tax payable, income tax expense and deferred income taxes is as follows:
Income Tax Expense 227,760*
Deferred Tax Asset 12,000
Deferred Tax Liability ($9,000 + $7,500) 16,500
Income Tax Payable 223,260
*Deferred tax expense for 2010
(from deferred tax liability) ($9,000 + $7,500) $ 16,500
Deferred tax benefit for 2010
(from deferred tax asset) (12,000)
Net deferred tax expense for 2010 4,500
Current tax expense for 2010
(income tax payable) 223,260
Income tax expense for 2010 $227,760
P19-9 Wise Company began operations at the beginning of 2011. the following information pertains to this company. 1. Pretax financial income for 2011 is $100.000 2. The tax rate enacted for 2011 and future years is 40% 3. Differences between the 2011 income statement and tax return are listed below: a. Warranty expense accrued for financial reporting purposes amounts to $7,000. Warranty deductions per the tax return amount to $2000. b. Gross profit on construction contracts using the percentage-of-completion method per books amounts to $92000. Gross profit on construction contracts for tax purposes amounts to $67000. c. Depreciation of property, plant, and equipment for financial reporting purposes amounts to $60000. Depreciation of these assets amounts to $80000 for the tax return. d. A $3500 fine paid for violation of pollution laws was deducted in computing pretax financial income. e. Interest revenue earned on an investment in tax-exempt municipal bonds amounts to $1500. (Assume (a) is short-term in nature; assume (b) and (c) are long-term in nature). 4. Taxable income is expected for the next few years. Instruction: a. Compute taxable income for 2011. b. Compute the deferred taxes at December 31, 2011, that relate to the temporary differences describet above. Clearly label them as deferred tax asset or liability. c. Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2011. d. Draft the income tax expense section of the income statement begining with " Income before income taxes."
(a) Pretax financial income $100,000
Permanent differences:
Fine for pollution 3,500
Tax-exempt interest (1,500)
Originating temporary differences:
Excess warranty expense per books
($7,000 – $2,000) 5,000
Excess construction profits per books
($92,000 – $67,000) (25,000)
Excess depreciation per tax return
($80,000 – $60,000) (20,000)
Taxable income $ 62,000
(b)
TemporaryDifference / Future Taxable (Deductible) Amounts / Tax Rate / Deferred Tax
(Asset) / Liability
Warranty costs / $ (5,000) / 40% / $(2,000)
Construction profits / 25,000 / 40% / $10,000
Depreciation / ( 20,000 / 40% / * 8,000
Totals / ($40,000 / $(2,000) / *$18,000*
*Because of a flat tax rate, these totals can be reconciled: $40,000 X 40% = $(2,000) + $18,000.
(c) Income Tax Expense 40,800
Deferred Tax Asset 2,000
Deferred Tax Liability 18,000
Income Tax Payable 24,800
Taxable income for 2011 [answer part (a)] $62,000
Tax rate 40%
Income tax payable for 2011 $24,800
Deferred tax liability at the end of 2011 [part (b)] $18,000
Deferred tax liability at the beginning of 2011 0
Deferred tax expense for 2011 $18,000
Deferred tax asset at the end of 2011 $ 2,000
Deferred tax asset at the beginning of 2011 0
Deferred tax benefit for 2011 $ (2,000)
Deferred tax expense for 2011 $18,000
Deferred tax benefit for 2011 (2,000)
Net deferred tax expense for 2011 $16,000
Current tax expense for 2011 (Income tax payable) $24,800
Deferred tax expense for 2011 16,000
Income tax expense for 2011 $40,800
(d) Income before income taxes $100,000
Income tax expense
Current $24,800
Deferred 16,000 40,800 Net income $ 59,200