Question

Problem 3. Walsh Services computed pretax financial income of $220,000 for 2017 and 5288,000 for 2018. In preparing the income tax return for the year, the tax accountant determined the following differences between financial income and taxable income for 2017 and 2018: 2017 2018 (1) Nondeductible expenses $40,000 30,000 (2) Nontaxable revenues 14,000 22,000 (3) Uneamed rent of next two years received 20,000 (4) Installment sales in financial income but not in taxable income 70,000 The temporary Installment sales difference is expected to reverse in the following pattern 2018 $14,000 2019 32,000 2020 24,000 $70,000 (5) Walsh purchase a new machine in 2018 for $150,000 and depreciates $50,000 a year from 2018 to 2020. For tax reporting, the depreciation expense is as follows: 2018 S100,000 2019 35,000 2020 15.000 S150,000 The enacted tax rates for this year and the next three years are as follows 2017 40% 2018 35% 2019 32% 2020 30% Instructions (1) Prepare a schedule showing the reversal of the temporary differences and the computation of income taxes payable and deferred tax assets or liabilities as of December 31, 2017 (2) Prepare journal entries to record income taxes payable and deferred income taxes for 2017. (3) Prepare the income statement for Walsh Services beginning with "Income from continuing operations before income taxes" for the year ended December 31, 2017 (4) Prepare journal entries to record income taxes payable and deferred income taxes for 2018 (5) Prepare the income statement for Walsh Services beginning with "Income from continuing operations before income taxes" for the year ended December 31, 2018

Answer 1

Summary of Deferred Tax

1 When Financial Income is higher than Taxable Profit - Pay less tax now - Pay more tax in Future- create DTL Deferred tax Liability

2 When Financial Income is less than taxable income - Pay more tax now - Pay less tax in Future- create DTA Deferred tax Assets.
- Summary of Deffered lan Financial Income higher of Pay less tax than the Paxable Profit now Pay more tax in Future h Greate DTL[Dyerred Tax Liability @ Pay more fax now . Book Profit is or Financial Income is less than the Taxable Prosit f L Pay less tax in future Greates DTA Degerred tox Assets] Finding Current Tax Payable. - 2017 2018 Pre-tax Financial Income $220,000 $288,000 (+) Non-deductible Expenses $ 40,000 $30,000 as per Tax laws Bi-) Non Taxable Revenues as <14000) $ 22,000) pes Tax laws For Current - Year • Unearned rent [Refer Note] Installment sales inot Parable as per tax laws ($ 70,000) ② Depreciation as per lax. Cas already deducted. ($50,000) $15000 50,000 $ in Fin Income Balance in Tarcable Income $ 126,000 $311,000 Rate of lax 40% 354. Current Tax $ 50,400 $108,850

SURYA Gold Calculation of Timing Depreciation. Non- deductible Expenses Non- Taxable Revenue Installment sales Difference of 2018 Financial Tax 50,000 35000 30,000 - 22,000 14000 Dyesente 15000 (30,00 (22000) 14000 for 2018 (DTA DTL 354 15000X 35% = 5250 DTU - Reversal 30,000 X 35%. = (10,500 DTA - Orginating 22000 x 351 39700 CDTL - Organating 14000 x 351 - 4900 (07) - Reversing +350 1 Opening Balonce DTL 37600 (-) Reversing 52504 4900) 10,150. closing Balance of 27,450 DTL A DTA (2018) (10,500) HDTL (2018) 7700 closing Balance 24,650 of OYL Journal Entries i same as 2017. 2018 Current Para $ 108,850 DTA Corgin) Tosoo DTL - Balance . $. 35,150. Note :- It is Assunced that, Both in Financial Income Ę Tax Income, Mercantile system of Accounting is followed. So, when. Unearned Rent of next years. Received will be accounted of Income Only when it is Earned as per Mercantile system of Accounting, Not when if i Received So, In Both Financial § lose Income it will not be considered hence No

Calculation of Timing of Financial Tax Opening Balance of (OTA)/OTL Depreciation Non-deductible Expenses. Non- Tascable Revenues. Installment sales 50,000 100,000 40,000 0 140000 70,000 Difference IOTA)/OTL@ 40% 50,000 50,000 x 40% = 20,000 [Dty Orginating TD (40,oog (40,00DX 40% = 16,000) DTA) 14000 14000 x 40%= 5600 CDTJ " 70,000 70,000 x 407 = 28000 (012) 4 closing Balance of 37.600 (DTU (OTA)/OTL. Income Tax Payable in 2017. Current Tax $ 50,400 DTA [Greation] $ 16,000 DTL [creation] $ 53,600 - Total (20,000 + 5600+ 28000] 0 $50,400 Journal Entries for 2017. Profit Ę closs Alc. or Dr To Current Tax Alc [Being Provision for Current year ton] $50,400 Dr $53,600 $53,600 2. Profit Ę loss Al To Dejersed Tax Alc. [Being DTL created ] ② Dejersed Tax Al To Profit § Loss Al Being DTA created Dr $16000 $16,000 -