Question

1. Charolaise had $55,000 of net income before tax in their first year of operations. The only income or expense that was recognized differently for book and tax purposes was the method in which they recognized revenue. Charolaise used a percentage of completion for book purposes and completed contract method for tax purposes. Contract revenue for book was $92,000 and $62,000 for tax. The tax rate was 30%. Prepare the journal entry for income taxes for the current year.

Answer 1

The income tax should have been paid on the income or revenue that is received on the basis of % of completion method. Since Charolaise has recognized an income of $ 62000 for tax purposes, he must have passed a journal entry of $18200 instead of $ 27600 (30% of 92000) for Income tax, therefore an additional entry of $9000 should be passed making a total income tax of $27600.

Original Entry
Prop. Capital Account       Dr.		$18,600
To Income Taxes			$18,600
Income Taxes                    Dr.		$18,600
To Bank			$18,600
Additional Entry
Prop. Capital Account       Dr.		$9,000
To Income Taxes			$9,000
Income Taxes                    Dr.		$9,000
To Bank			$9,000