Question

Homework Assignment (Chapter 19: Accounting for Income Taxes) Johnny Bravo Ltd. began operations in 2019 and has provided the following information.

1. Pretax financial income for 2019 is £100,000.

2. The tax rate enacted for 2019 and future years is 40%.

3. Differences between the 2019 income statement and tax return are listed below.

a. Warranty expense accrued for financial reporting purposes amounts to £5,000. Warranty deductions per the tax return amount to £2,000.

b. Gross profit on construction contracts using the percentage of completion method for books amounts to £92,000. Gross profit on construction contracts for tax purposes amounts to £62,000.

c. Depreciation of property, plant, and equipment for financial reporting purposes amounts to £60,000. Depreciation of these assets amounts to £80,000 for the tax return.

d. A £3,500 fine paid for violation of pollution laws was deducted in computing pretax financial income.

e. Interest revenue earned on an investment in tax-exempt government bonds amounts to £1,400.

4. Taxable income is expected for the next few years.

Instructions 1. Compute taxable income for 2019. 2. Compute the deferred taxes (DTA & DTL) on December 31, 2019, that relate to the temporary differences described above. 3. Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2019. 4. Draft the income tax expense section of the income statement, beginning with “Income before income taxes.” 5. Assume that in 2020 Johnny Bravo reported a pretax operating loss of £100,000. There were no other temporary or permanent differences in tax and book income for 2020. Prepare the journal entry to record income tax expense for 2020. Johnny Bravo expects to return to profitability in 2021.

Answer 1

1. Taxable income for 2019

Pretax Financial Income	1,00,000
Permanent Differences:
Fine for Pollution	3,500
Less :- Tax exempt interest	-1400
Temporary differences
Excess Warranty Expense
($5000 - $2000)	3,000
Less:- Excess profit on construction
($92,000 - $62,000)	-30000
Excess Depreciation
($80,000 - $60,000)	-20000
Taxable income	55100

2. Schedule of DTA & DTL

Difference	Amount	Tax Rate	DTA	DTL
Excess Warranty Expense	3000	40%	1200
Excess profit on construction	30000	40%		12000
Excess Depreciation	20000	40%		8000
Total	47000		1200	20000

3. Journal entry

Account	Debit	Credit
Income Tax Expense (22040 + 20000 -1200)	40840
Deferred Tax Asset	1200
Deferred Tax Liability		20000
Income Tax Payable (55100 * 40%)		22040

4. Income tax expense section in Income Statement

Income before Income Taxes		100000
Income Tax Expense
Current	22040
Deferred (20000 - 1200)	18800
Total		40840
Net Income		59160

Note: As per HOMEWORKLIB POLICY, in case of multiple sub questions, only the first 4 need to be answered.