Question

Please check my answers.

1. Prepare Journal Entry to record income tax expense, deferred taxes, and income taxes payable for 2018 2. Draft the income tax expense section of the Income Statement, beginning with Income before income taxes". . Write an analysis directed toward the team at Good Company describing what the numbers mean and how they relate to the business. Information: Good Company began operations in 2018 and has provided the following information: 1. Pretax financial income for 2018 is $200,000 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 purpose amounts to S10,000. Warranty deductions per tax return amount to $4,000. b. Gross profit on construction contracts using the percentage of completion method for book purposes amounts to S184,000. Gross profit on construction contracts for tax purposes amounts to S124,000. c. Depreciation of property, plant, and equipment for financial reporting purposes amounts to S60,000. Depreciation of these assets amounts to S80,000 for the tax return. d. A S3,500 fine paid for violation of pollution laws was deducted in computing pretax financial incomes. e. Interest revenue earned on an investment in tax-exempt municipal bonds amounts to $1,400.

Answer 1

1) Journal Entry Passed by you is correct and is in accordance with the accounting treatment, Calculations of Deferred tax asset and deferred tax liability is also correct.

You have correctly identified the permanent and timing differences and have treated them accordingly in your computation.

But as question has given the data for the year 2018 so maybe date of journal entry in the answer is not in conformity with the information given in the question.

2) Income Tax expense section of income statement is also correctly presented and is very neat.

3)The current tax depicts the amount which has to be paid by the company in the current year i.e. $51,240 and the deferred tax i.e. 29,600 depicts the tax which will be paid in the forthcoming years by the company on account of reversal of timing differences.