Question

rarti: Sass Corp. is in its first year of operation. The company has pretax financial income of $50,000 The company has the following items recorded in its records. No estimated tax payments were made during 2020. 6,500 Premium of life insurance for its key officers 17,500 Tax depreciation in excess of book depreciation 100,000 Interest on municipal bonds 5,800 Warranty expense Actual warranty repairs 4,200 Bad debt expense 2,200 Beginning balance in allowances for uncollectible accounts End balance in allowances for uncollectible accounts Tax rates for 2020 and future years 20% INSTRUCTIONS: (a) Determine taxable income for 2020. (b) Prepare the journal entry to record income taxes for 2020. (C) Prepare the income tax expense section of the income statement for the year ended Dec. 31, 2020. 900

Answer 1

a.

Particulars	2020
Pre tax financial income	50,000
Add: Life insurance premium	17,500
Less: Excess depreication as per tax	-1,00,000
Add: Interest on municipal bonds	5,800
Add: Warranty expense	6,500
Actual warranty repairs	Note 1
Bad debt expense	Note 2
Uncollectible accounts (Note 3)	900
Taxable income	-19,300

Note 1 - Since actual warranty repairs have been incurred and the same has been deducted in Books of Accounts, no adjustment is required for arriving at taxable income for this adjustment.

Note 2 - Since bad debt expense has been incurred and the same has been deducted in Books of Accounts, no adjustment is required for arriving at taxable income for this adjustment. It is assumed that in previous years, the income was offered to tax.

Note 3 - Since provision for uncollectible accounts is made, and actual expense has not been incurred, the same shall be added back.

b. Since taxable income is negative i.e. loss is incurred , no entry for Income tax payable.

Deferred tax Liability …..(100000*20%)	20000
To Deferred Tax Expense A/c		20000
(Creating DTL on Depreciation)

Deferred Tax Expense A/c (30700*20%)	6140
To Deferred tax Liability		6140
(Creating DTL on Life insurance, interest on municipal bonds, warranty expense, uncollectible accounts which shall be realized when actual payment is made)

c. Refer answer to (a)