Question

Allmond Corporation, organized on January 3, 2018, had pretax accounting income of $20 million and taxable income of $30 million for the year ended December 31, 2018. The 2018 tax rate is 35%. The only difference between accounting income and taxable income is estimated product warranty costs. Expected payments and scheduled tax rates (based on recent tax legislation) are as follows: 2019 $ 3 million 30 % 2020 2 million 30 % 2021 2 million 30 % 2022 3 million 20 % Required: 1. Determine the amounts necessary to record Allmond’s income taxes for 2018 and prepare the appropriate journal entry. 2. What is Allmond’s 2018 net income?

Answer 1

1) Deferred tax asset or deferred tax liability is equal to future tax on temporary differences between accounting income and taxable income. If there is a saving in future tax due to temporary differences then deferred tax asset will be created and if there is a future liability then deferred tax liability will be created.

In the given case, taxable income is more than the accounting income which will create deferred tax asset for future.

Calculation of Deferred Tax Asset is shown as follows:- (Amounts in million $)

Tax saving on Expected payment in 2019 ($3 million*30%)	0.90
Tax saving on Expected payment in 2020 ($2 million*30%)	0.60
Tax saving on Expected payment in 2021 ($2 million*30%)	0.60
Tax saving on Expected payment in 2022 ($3 million*20%)	0.60
Deferred Tax Asset to be created for 2018	2.70

Income Tax Payable for 2018 = Taxable Income*tax rate of 2018

= $30 million*35% = $10.50 millions

Income tax expense for 2018 = Income tax payable - Deferred tax asset created

= $10.50 millions - $2.70 millions = $7.80 millions

Journal Entry (Amounts in Millions $)

Date	Account Titles and Explanations	Debit	Credit
Dec 31, 2018	Income tax expense	7.80
	Deferred tax asset	2.70
	Income tax payable		10.50
	(To record the income tax expense)

2) Calculation of Allmond’s 2018 net income (Amounts in Millions $)

Pretax Accounting Income	20.00
Less: Income tax expense	7.80
Net Income	12.20

Therefore Allmond's 2018 net income is $12.20 millions.