Question

year. mone lax expense for the year assumi or the year assuming that the tax rate is 40% this year and 50% starting next (3) Prepare the income tax expense section of the income statement, beginning with "Income before income taxes. (4) Indicate how deferred income taxes should be presented on the balance sheet. Problem 3. Walsh Services computed pretax financial income of $220,000 for 2017 and $288,000 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 (1) Nondeductible expenses 2018 $40,000 30,000 (2) Nontaxable revenues 14,000 22,000 (3) Unearned 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 S14,000 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 $100,000 2019 35,000 K19-1

Answer 1

Calculation of Current Tax :

Financial Year	2017
Income before taxes	220,000
Add : Non deductible expenses	40,000
Less : Non Taxable revenues	(14,000)
Add: Uneraned rental income	20,000
Less: Installment Sales Income	(70,000)
Taxable Income	196,000
Income tax @ 40%	78,400

Calculation of deferred Tax - 2017	Temporary difference Settlement year
	2018	2019	2020
Temporary difference resulting into deferred tax Asset for Unearned income arising in 2017	10,000	10,000
Temporary difference resulting into Deferred Tax liability for Installment Sales arising in 2017	(14,000)	(32,000)	(24,000)
Net Deferred Tax liability	(4,000)	(22,000)	(24,000)
Tax Rate	35%	32%	30%
Net Deferred Tax liability	(1,400)	(7,040)	(7,200)

Q.2 : 2017 Income tax & deferred tax Entry

Account	Debit	Credit
Current Tax	78,400
Corporate Tax Payable		78,400
(Being 40% tax on taxable income of 78400)
Deferred Tax	15,640
Deferred Tax Liability		15,640
(Being deferred tax accounted for temporary difference arising in 2017)

Q.3 Income Statement for year ended 2017

Income from continuing operation before income taxes	220,000
Add : Non deductible expenses	40,000
Less : Non Taxable revenues	(14,000)
Add: Uneraned rental income	20,000
Less: Installment Sales Income	(70,000)
Taxable Income	196,000
Income tax @ 40%	78,400

Q.4 : Journal Entry for income tax and deferred tax for 2018

Calculation of Current Tax 2018

Financial Year	2018
Income before taxes	288,000
Add : Non deductible expenses	30,000
Less : Non Taxable revenues	(22,000)
Less : Unearned rental income recognition which is previously taxed	(10,000)
Add: Taxable installment sales	14,000
Add : Book Depreciation	50,000
Less : Tax Depreciation	(100,000)
Taxable Income	250,000
Tax Rate	35%
Current Tax	87,500

Deferred Tax calculation - 2018	Temporary difference Settlement year
	2019	2020
Temporary difference resulting deferred tax liability in 2018 for depreciation	(15,000)	(35,000)
Reversal of Temporary difference resulting into reversal of Deferred Tax liability for Installment Sales in 2018	(14,000)
Reversal of temporary difference resulting into reversal of deferred tax Asset for Unearned income in 2018	10,000
Total	(19,000)	(35,000)
Tax Rate	32%	30%
Deferred Tax Liability	(6,080)	(10,500)

Account	Debit	Credit
Current Tax	87,500
Corporate Tax Payable		87,500
(Being 40% tax on taxable income of 78400)
Deferred Tax	16,580
Deferred Tax Liability		16,580
(Being deferred tax accounted for temporary difference arising in 2018)