Question

Harms Way Company (HWC) provides you with the following information for the year ended October 31, 2019. Your assignment is to calculate income tax expense, income taxes payable, and deferred income tax assets/liabilities. The end result will be a journal entry to record all of that. In addition, you must calculate HWC’s effective tax rate and prepare a reconciliation to the federal statutory rate of 21%.

Information provided:
1. Income before tax, as shown on HWC’s GAAP statement of income = $2,110,000

2. Depreciation calculated under GAAP = $300,000. Depreciation as will be shown on the tax return = $375,000.

3. Interest income on municipal bonds, which is not subject to federal income tax = $150,000.

4. Fines recorded and paid during the year to the EPA for environmental violations = $450,000. Fines are not tax deductible.

5. Meals and entertainment expenses recorded during the year = $375,000. Only one-half (50%) of those expenses may be deducted for tax purposes.

6. At the end of the fiscal year (in October 2019), HWC received a payment of $750,000 from a client for a product to be delivered in November. Under the newest tax law, that payment is taxable when received, not when the product is delivered.

Your Assignment:

Calculate:

• Income tax expense (GAAP). • Income taxes currently payable. • Deferred income taxes resulting from this year’s operations, classified as deferred tax assets and separately deferred tax liabilities (don’t worry about the current/noncurrent classification, just asset/liability).

Answer 1

Income before tax	$       2,110,000
Add: non deductible expenses
Fines not allowed	$          450,000
Meals expenses	$          187,500	$ 375,000*50%
Advance received	$          750,000
Less: Allowed deductions
Excess depreciation	$           (75,000)	($ 300,000-$ 375,000)
Interest on municipal bonds	$        (150,000)
Income taxes currently payable	$       3,272,500
Calculation of Deferred taxes
	DTA	DTL	Working
Excess depreciation allowed		$                        15,750	75000*21%
Interest income	$                     -	$                                -	As they would not attract any tax effects in coming tax periods
Fines not allowed	$                     -	$                                -	As they would not attract any tax effects in coming tax periods
Meals expenses	$                     -	$                                -	As they would not attract any tax effects in coming tax periods
Advance received	$          157,500	$                                -	750000*21%
Total	$          157,500	$                        15,750
Calculating income tax expense
Current tax payable	$       3,272,500
Net deferred taxes	$          141,750	$ 157,500 - $ 15,750
Income tax expense (GAAP)	$       3,414,250
Deferred tax assets	$          157,500
Deferred tax liabilities	$            15,750

Please like the solution if satisfied with the answer and if any queries please mention it in comments...thanks