Question

Part II: Bill Inc, began business on Jan. 1, 2017. Its pretax financial income for the first 2 years was as follows: 2017 $620,000 2018 715,000 The following items caused the only differences between pretax financial income and taxable income. 1. In Jan. 1, 2017, the company pays at once $27,000 of 3 years rent through 2019 for a leased warehouse. 2. The company pays, for environmental problems, $22,000 fine in 2017 and $18,000 fine in 2018. 3. In 2018, the company terminated a top executive and agreed to $600,000 of severance pay. The amount will be paid $200,000 per year for 2018-2020. The 2018 payment was made. The $600,000 was expensed in 2018. For tax purposes, the severance pay is deductible as it is paid. The enacted tax rates existing at December 31, 2017 are: 2017 35% 2019 20% 2018 20% 2020 20% INSTRUCTIONS: (a) Determine taxable income for 2017 and 2018. (b) Prepare the journal entry to record income taxes for 2017 and 2018. (e) Prepare the income tax expense section of the income statement for the year ended December 31, 2017 & 2018 (d) Show how the deferred income taxes should be reported on the balance sheet at Dec 31, 2018.

Answer 1

Answer: a) Calculation of the Taxable income for 2017 and 2018. particulars 2017 2018 Accounting Income $620,000 $715,000 Adjustment for prepaid sent $18.000 19.000) 627,000/3] Adjustment for environmental fines Adjustment $22,000 18.000 for service pay [$600,000-$200,000] $400,000 Taxable Income $660,000 $1124,000 b) Journal entry to record income tax for 2017 and 2014. catculation of current Tax payable. partieulars 2017 2018 Taxable income (compelled above) $660000 $1,124,000 Tax Rales 35% 20% Current Tax payable. $231,000 $224,800 Journal entry: Date particulars . LF Debit credit 2017 Income statement Ale or $227,400 Deferred Taz asset Al (18000x2070 $3,600 - To Income Tax payable $231000 Being record Income Tax due for 2017 2018 Income statement te or $146.600 Deferred Tax Asset te Oy J78200 10 Income Tax payable 224.800 [1109000x20%- 9000x204)-78,200) Being record Income Taxe due for 2018] c) Income stateme other end of the year 3, 201782014. posticulars 2017 2018 Income before Tax $ 620,000 $715,000 Less Income Tax 231,000 224,800 Add: Deferred Tax Asset 13600 $ 78,000 Income aftex Tax |$392,600 $568400

2018 2017 $3,600 $1,800 I d) calculate the Deferred Tax particulars prepaid Rent [68.000 x 204.). (9000x20%)] Environmental Hines Serverence pay 100,000 x204] Net Deferred Tax. No data I no data. $80000 $ 3.600 $78200 Balance sheet 2017 I 2018 current Assets Net Deferred Tax Asset $3.500 $78,200