Question

Problem 19-9 Bridgeport Company began operations at the beginning of 2018. The following information pertains to this company. 1. Pretax financial income for 2018 is $88,000. 2. The tax rate enacted for 2018 and future years is 40%. 3. Differences between the 2018 income statement and tax return are listed below: (a) Warranty expense accrued for financial reporting purposes amounts to $ 7,700. Warranty deductions per the tax return amount to $1,900. (b) Gross profit on construction contracts using the percentage-of-completion method per books amounts to $100,900. Gross profit on construction contracts for tax purposes amounts to $65,900. (c) Depreciation of property, plant, and equipment for financial reporting purposes amounts to $55,200. Depreciation of these assets amounts to $77,000 for the tax return. (d) A $3,400 fine paid for violation of pollution laws was deducted in computing pretax financial income. (e) Interest revenue recognized on an investment in tax-exempt municipal bonds amounts to $1,400. 4. Taxable income is expected for the next few years. (Assume (a) is short-term in nature; assume (b) and (c) are long-term in nature.) x Your answer is incorrect. Try again. Compute taxable income for 2018. Taxable income for 2018 SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT LINK TO TEXT X Your answer is incorrect. Try again. Compute the deferred taxes at December 31, 2018, that relate to the temporary differences described above.

Answer 1

Bridgeport Company Requirement a. 88000 3400 - 1400 Pretax financial income Permanent differences: Fine for pollution Tax-exempt interest Originating temporary differences: Excess warranty expense per books ($7,700 - $1,900) Excess construction profits per books ($100,900 - $65,900) Excess depreciation per tax return ($77,000 - $55,200) Taxable income 5800 -35000 -21800 39000 Requirement b. Temporary Difference Warranty costs Construction profits Depreciation Totals Future Taxable (Deductible) Amounts Tax Rate -5800 40% 35000 40% 21800 40% 51000 Deferred Tax (Asset) Liability -2320 14000 8720 -2320 22720 Because of a flat tax rate, these totals can be reconciled: $40,000 X 40% = $(2,320) + $22,720 Requirement d. 88000 Income before income taxes Income tax expense Current 15600 Deferred 20400 Net 36000 52000

Requirement c. Journal Enteries Date Particulars Income Tax Expense a/c Dr. Deferred Tax Asset a/c Dr. To Deferred Tax Liability To Income Tax Payable Debit in $ Credit in $ 36000 2320 22720 15600 Taxable income for 2018 (answer part (a)] Tax rate Income tax payable for 2018 39000 40% 15600 22720 Deferred tax liability at the end of 2018 (part (b)] Deferred tax liability at the beginning of 2018 Deferred tax expense for 2018 22720 2320 Deferred tax asset at the end of 2018 Deferred tax asset at the beginning of 2018 Deferred tax benefit for 2018 -2320 Deferred tax expense for 2018 Deferred tax benefit for 2018 Net deferred tax expense for 2018 22720 -2320 20400 Current tax expense for 2018 (Income tax payable) Deferred tax expense for 2018 Income tax expense for 2018 15600 20400 36000