Question

John Hicks Company reports the following revenues and expenses in its pretax financial income for the year ended December 31, 2016: Revenues total $229,600 and expenses total $160,100. The tax rate enacted for 2016 is 35%, but in 2015 Congress enacted a 30% rate for 2017 and future years. Differences between the 2016 income statement and tax return are listed below: Warranty expense accrued for financial reporting purposes amounts to $5,000. Warranty deductions per the tax return amount to $13,900. Depreciation deducted for financial reporting exceeded depreciation deducted for income taxes by $11,000. Percentage depletion deducted for income taxes exceeded cost depletion deducted for financial reporting by $15,600. Legal expense of $9,800 was deducted for financial reporting; it will be deducted for income taxes when paid in a future year. John Hicks expects its percentage depletion to exceed its cost depletion in each of the next 5 years by the same amount as in 2016. At the end of 2016, the other three expenses are expected to result in total future taxable or deductible amounts as follows: Totals: Future Taxable Amounts Depreciation expense difference $63,000 Future Deductible Amounts Warranty expense difference 48,400 Legal expense difference 9,800 At the beginning of 2016, Quick had a deferred tax liability of $22,200 related to the depreciation difference and a deferred tax asset of $17,190 related to the warranty difference.

Prepare the journal entries to record transactions as required Journal Entries tax related transactions DateTransactions and Accounts Debit Credit Provide a one line explanation for the reason why the journal entry has been made You may add as many rows as needed to prepare your journal entries

Answer 1

Ans: John Hicks Company

Working Note:

1) Computation of Income tax

Particulars		Amount ($)
Profit before tax in the books
Revenue	229600
Expenses	-160100
		69500
Less
Excess of warranty expenses in tax as against books	8900
Excess Depletion deduction in tax as compare to books	15600
		24500
Add
Excess of depreciation in books as compare to tax	11000
Accrued legal expenses	9800
		20800
Income as per income tax		65800
Tax @35%		23030

2) Computation of Deferred Tax  

Particulars		Amount ($)
Opening balance of deferred tax
Future Taxable Amounts Depreciation expense	-63000
Future Deductible Amounts Warranty expense	48400
Future Deductible Amounts Legal expense	9800
		-4800
Excess of depreciation in books as compare to tax		11000
Accrued legal expenses		9800
Excess of warranty expenses in tax as against books		-8900
Timing Difference Asset		7100
Deferred tax asset to be created (Tax @ 35%)		2485
Opening Deferred tax
Deferred tax Asset	17190
Deferred tax Liability	-22200
		-5010
Closing deferred tax Liability		-2525

A) Journal Entries

Date	Transaction	Debit ($)	Credit ($)
31.Dec.2016	Profit and loss A/c Dr. To Provision for taxation A/c	23030	23030
31.Dec .2016	Deferred Tax Asset A/c Dr. To Profit and Loss A/c	2485	2485

B) Income Statement

Particulars	Amount ($)
Income before tax	69500
Provision for tax	-23030
Deferred tax Asset	2485
Income after tax	48955