Question

DEFERRED TAXES 20 MINUTES 24 POIN Tarik Cohen Company began operations at the beginning of 2019. The following information pertains this company. 1. Pretax financial income for 2019 is $500,000. 2. The tax rate enacted for 2019 and future years is 40%. 3. Differences between the 2019 income statement and tax return are listed below: (a) Warranty expense accrued for financial reporting purpose, $44,000. Warranty deductions per tax return, $12,000. (b) Gross profit on construction contracts using the percentage-of-completion method per books, $236,000. Gross profit on construction contracts for tax purposes, $106,000. (C) Depreciation of property, plant, and equipment for financial reporting purposes, $76,000. Depreciation of these assets for the tax return, $144,000. (d) Fines incurred for violation of pollution were $8,000. 0 0 (e) Interest revenue on State of North Carolina bonds totaled $4,000. INSTRUCTIONS (W) Compute taxable income and income taxes payable for 2019, (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2019. (c) Prepare the income tax expense section of the income statement for 2019, beginning with "Inc before income taxes."

Answer 1

a) Computation of Taxable Income and tax payable

Particulars	Amount ($)
Pre-tax financial income	500,000
Add: Warranty exp as per financial reporting	44,000
Less: Warranty exp for tax return purpose	(12,000)
Less: Gross profit on construction contracts per books	(236,000)
Add: Gross profit on construction contracts for tax purpose	106,000
Add: Depreciation as per books	76,000
Less: Depreciation as per tax	(144,000)
Add: Fines for violation of pollution (Not allowed under tax return)	8,000
Less: Interest revenue on state bonds (Exempt from income tax)	4,000
Taxable Income	346,000
Tax payable @ 40%	138,400

b) Journal entries

Calculation of deferred income taxes

Temporary differences between taxable and financial income = 44,000-12,000-236,000+106,000+76,000-144,000+4,000 = $ 162,000

Since, Taxable income is lower, deferred tax liability is created to that extent.

Deferred tax liability = $ 162,000 * 40% = $ 64,800

S.No	Account Titles	Debit ($)	Credit ($)
1	Tax expense – current	138,400
	Tax expense – deferred	64,800
	Income tax payable		138,400
	Deferred tax liability		64,800

c) Income statement extract

Particulars	Amount ($)	Amount ($)
Income before income taxes		500,000
Less: Tax expense:
Current tax	138,400
Deferred tax	64,800	(203,200)
Income after tax		296,800