Question

Olympus Motors, Inc., computed a pretax financial income of $90,000 for its first year of operations ended December 31, 2015. In preparing the income tax return for the year, the tax accountant determined the following differences between 2015 financial income and taxable income.

Nondeductible expenses	$25,000
Nontaxable revenues	15,500
Temporary difference—installment sales reported in financial income but not in taxable income	32,000

The temporary difference is expected to reverse in the following pattern as the cash is collected:

2016	$ 7,000
2017	16,500
2018	8,500
Total	$32,000

The enacted tax rates for this year and the next three years are as follows:

2015	40%
2016	35
2017	33
2018	30

Instructions:

• 1. Prepare journal entries to record income taxes payable and deferred income taxes.
• 2. Prepare a partial income statement for Olympus Motors beginning with Income from continuing operations before income taxes for the year ended December 31, 2015.

Answer 1

Part 1

No.	General journal	Debit	Credit
1	Income Tax Expense	27000
	Income Taxes Payable (67500*40%)		27000
2	Income Tax Expense	10445
	Deferred Tax Liability—Current		2450
	Deferred Tax Liability—Noncurrent		7995

Pretax financial income	90000
Nondeductible expenses	25000
Nontaxable revenues	(15500)
Gross profit on installment sales	(32000)
Taxable income	$67500

	Enacted rate	Taxable amount	Liability valuation
2016	35%	7000	2450
2017	33%	16500	5445
2018	30%	8500	10445

Part 2

Olympus Motors, Inc. Partial Income Statement For the Year Ended December 31, 2015
Income from continuing operations before income taxes		90000
Income taxes on continuing operations:
Current provision	27000
Deferred provision	10445	37445
Net income		$52555