Question

The pretax financial income of Oriole Company differs from its taxable income throughout each of 4 years as follows. Year Pretax Financial Income Taxable Income Tax Rate 2017 $285,000 $178,000 35 % 2018 318,000 234,000 40 % 2019 381,000 282,000 40 % 2020 402,000 593,000 40 % Pretax financial income for each year includes a nondeductible expense of $28,600 (never deductible for tax purposes). The remainder of the difference between pretax financial income and taxable income in each period is due to one depreciation temporary difference. No deferred income taxes existed at the beginning of 2017. Prepare journal entries to record income taxes in all 4 years. Assume that the change in the tax rate to 40% was not enacted until the beginning of 2018.

Answer 1

Cumulative temporary difference at each year-end must be computed:
	2017	2018	2019	2020
Pretax financial income	$285,000	$318,000	$381000	$402,000
Add: Nondeductible expense	$28,600	$28600	$28600	$28600
Total	$313,600	$346,600	$409,600	$430,600
Less: Taxable income	-$178,000	-$234,000	-$282,000	-$593,000
Temporary difference originating (reversing)	$135,600	$112,600	$127,600	−162,400
Cumulative Temporary Difference At End of Year
2017		$135600
2018	$135600 + 112600	$248,200
2019	$248,200 + 127600	$375,800
2020	$375,800- 162400	$213,400
Because the temporary difference causes pretax financial income to exceed taxable income in the period it originates, the temporary difference will cause future taxable amounts

Date	Account Titles and Explanation	Debit	Credit
2017	Income Tax Expenses	$109,760
	Deferred Tax Liability ($135600 x 35%)		$47,460
	Income Tax Payable ($178,000 x 35%)		$62,300
2018	Income Tax Expense ($135600x 40%)-$47460	$6,780
	Deferred Tax Liability		$6,780
	(To record the adjustment for the increase in the enacted tax rate.)
	Income Tax Expenses	$138,640
	Deferred Tax Liability ($248200 x 40%)-($135600 x 40%)		$45,040
	Income Tax Payable ($234000 x 40%)		$93,600
	(To record income taxes for 2018.)
2019	Income Tax Expenses	$163,840
	Deferred Tax Liability ($375800 x 40%)-($248200 x 40%)		$51,040
	Income Tax Payable ($282,000 x 40%)		$112,800
	(To record income taxes for 2019.)
2020	Income Tax Expenses	$172,240
	Deferred Tax Liability ($213400 x 40%)-($375800 x 40%)	$64,960
	Income Tax Payable ($593,000x 40%)		$237,200
	(To record income taxes )

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