Question

Exercise 19-10 The following facts relate to Windsor Corporation. 1. Deferred tax liability, January 1, 2017, $61,200. 2. Deferred tax asset, January 1, 2017, $20,400. 3. Taxable income for 2017, $107,100. 4. Cumulative temporary difference at December 31, 2017, giving rise to future taxable amounts, $234,600. 5. Cumulative temporary difference at December 31, 2017, giving rise to future deductible amounts, $96,900. 6. Tax rate for all years, 40%. No permanent differences exist. 7. The company is expected to operate profitably in the future.

(A) Compute the amount of pretax financial income for 2017.

Pretax financial income $___________________

(B) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit

Allowance to Reduce Deferred Tax Asset to Expected Realizable Value
Benefit Due to Loss Carryback
Benefit Due to Loss Carryforward
Deferred Tax Asset
Deferred Tax Liability
Income Tax Expense
Income Tax Payable
Income Tax Refund Receivable
No Entry

(C) Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income taxes.” (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

	Windsor Corporation
	Income Statement Partial
????		$
?????
?????	$
???	$
		$
?????		$

Account Titles for Income Statement

Current, Deferred, Dividends, Expenses, Income before taxes, Income tax expense, Net Income/Loss,

Retained Earnings January 1, Retained Earnings December 31, Revenues, Total Expenses, Total Revenues

(D) Compute the effective tax rate for 2017. (Round answer to 0 decimal places, e.g. 25%)

The Effective TAx Rate ____________%

Answer 1

Solution A:

Computation of Required balance and recognition of Deferred tax liability and Deferred tax Assets - Windsor Corporation
Particulars	Amount
Cumulative temporary differences giving rise to future taxable amount	$234,600.00
Required ending balance in deferred tax liability ($234,600*40%)	$93,840.00
Existing balance of deferred tax liability	$61,200.00
Deferred tax liability to be recorded for current year	$32,640.00
Temporary differences for current year giving rise to future taxable amount ($32,640/40%)	$81,600.00
Cumulative temporary differences giving rise to future deductible amount	$96,900.00
Required ending balance in deferred tax Assets ($96,900*40%)	$38,760.00
Existing balance of deferred tax Assets	$20,400.00
Deferred tax assets to be recorded for current year	$18,360.00
Temporary differences for current year giving rise to future deductible amount ($18,360/40%)	$45,900.00

Computation of pretax financial income
Particulars	Amount
Taxable income	$107,100.00
Add: Temporary differences for current year giving rise to future taxable amount ($32,640/40%)	$81,600.00
Less: Temporary differences for current year giving rise to future deductible amount ($18,360/40%)	$45,900.00
Pre tax financial income	$142,800.00

Solution B:

Journal Entries - Windsor Corporation
Date	Particulars	Debit	Credit
31-Dec-17	Income tax expense Dr	$57,120.00
	Deferred tax assets Dr	$18,360.00
	To Income tax Payable ($107,100*40%)		$42,840.00
	To Deferred tax liability		$32,640.00
	(To record income tax and deferred tax for 2017)

Solution C:

Windsor Corporation
Income Statement (Partial)
For year ended December 31, 2017
Particulars		Amount
Income before taxes		$142,800.00
Less: Income tax expense:
Current Tax	$42,840.00
Deferred tax ($32,640 - $18,360)	$14,280.00
		$57,120.00
Net Income		$85,680.00

Solution D:

Effective tax rate for 2017 = Income tax expense / Pretax income = $57,120 / $142,800 = 40%