Question

E19-17B (Two Temporary Differences, Tracked through 3 Years, Multiple Rates) Taxable income and pretax financial income would be identical for Ursula Co. except for its depreciation on equipment pur- chased in 2014 for $500,000 and estimated costs of warranties. The following income computations have been prepared. Taxable income 2014 2015 2016 Excess of revenues over expenses (excluding two temporary differences) Tax Depreciation Expenditures for warranties Taxable income $265,000 (125,000) (10,000) $ 130,000 $ 630,000 (200,000) (50,000) $ 380,000 $ 250,000 (175,000) (15,000) $ 60,000 Pretax financial income 2014 2015 2016 Excess of revenues over expenses (excluding two temporary differences) Book depreciation Estimated cost of warranties Income before taxes $ 630,000 (100,000) $250,000 (100,000) $ 265,000 (100,000) (75,000) $ 90,000 $ 530,000 $ 150,000 The tax rates in effect are: 2014 and 2015, 30%; 2016 and thereafter, 40%. All tax rates were enacted into law on January 1, 2014. No deferred income taxes existed at the beginning of 2014. Taxable income is expected in all future years.

Answer 1

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Solution :- Journal entries : * Journal entry at December 31, 2014: particulars Debit credit $ 22000 $ 21000 Income Tax expense Alc or Deferred tax Asset All Dr To Income tax payable To Deferred tax liability $34000 $ 1o COD → Taxable income for Enacted tax rate Income tax payable 2014 $130000 307 for 2014 - 39000 balances at December 31, 2014, are The deterred determined as tax account follows: tax Liability difference Date Dettered Casset) Future taxable (Deductible) Amounts Temporary - 401 $ 10000 Depreciation warranty costs warranty costs $ 25000 $(50000) $(15000) 301 froscow) $(6000) 401 Totals - $Canece) şleco

10000 Deferred Deferred Deferred tax liability at the end of 2014 tar liability at the beginning of 2014 tax expense for 2014 (net increase in required in deferred tax liability) 10000 (21000) Deferred tax asset at the end of 2014 Deferred to asset at the beginning of 2014 Deferred tax expense (benefit) for 2014 (net increase required in deferred tax asset). $(210) Deferred tax expense for 2014 Deferred tax benefit for 2014 Net deferred expense for 2014 Corrent tax expense for 2014 (income tax Income tax expense for 2014 - $ 10000 (21000) $(11.000) payable) $39000 $ 22000 * Journal entry at December 31, 2015: particulars Debit credit $ 169000 Income tax expense Alc Dr. To Deferred tax liability TO Income tax payable TO Deferred tax asset $ 40000 5 114000 $ 15ooo $ 320000 301 Taxable income Enacted tax rate Income tax payable - for 2015 114000.

balances at December 31, 2015. a e deferred determined tax account as follows: Temporary difference Rate Future taxable (Deductible) Amants Deferred Tax Cassef liability $ 50000 Depreciation warranty costs $ 125000 $ (15000) 4011 40l. $16000) Torals - $. (6000) $ 50000 * Deferred tax liability at the end of 2015 Deferred tax liability at the beginning of 2a5 Deferred tar expense for 2015 t increase in required de ferred tax liability). & 50000 ť 10000 40000 Deferred Deferred tax tax $ (6000) $(21000) asset at the end of 2015 asset at the beginning of 205 in Deferred tax expense for 2015 (decrease required in deferred tax asset). si5000 Deferred tax expense for 2015 Deferred tax expense for at Net deferred tax benefit for 2015 Corrent tax expense for 2015 Income tax expense for 2015 - $ 40000 $ 16000 T 15000 $ 44000 $ 169000

Journal entry at December 31, 2016 : particolars Credit Debit I 60000 Income tax expense Ak or To Deferred tax liability To encome tax payable To Deferred tax asset + 30000 $24000 6000 → Taxable income for 2016 $ 6oooo Enacted tax rate 401 Income tax payable for 2016 1 24000 $ 80000 * Deferred S0000 Deferred Deferred toy liability at the end of 2016 [ie, $200 000 * 4010] tax liability at the beginning of aut tax expense for 2016 ( increare required in deferred tax kability) $30000 Deferred Deferred Deferred tax asset at the end of 2016 tax asset at the beginning of 2016 tax expense for 2016 (decrease required in deferred tax asset). $(6000) $ 6000 Deferred tax Deferred day Net deferred current tax Income tax expense for 2016 expense for 2016 Tax benefit for 2016 expense for 2016 expense for 2016 - $30000 $ 6000 $36000 $24000 $ 60000 $