Question

(1) Indicate how deferred income taxes should be presented on the balance sheet. Problem 3. Walsh Services computed pretax 1 wish Services computed pretax financial income of $220.000 for 2017 and $288,000 for 2018. In preparing the income 2017 and 2018: ... me year, the tax accountant determined the followine differences between financial income and taxable income for 2017 2018 (1) Nondeductible expenses $40,000 30,000 (2) Nontaxable revenues 14,000 22,000 (3) Unearned rent of next two years received 20,000 (9) 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 $100,000 2019 35,000 K19-1

please do in excel

Answer 1

Particulars Pretax Financial income Add: Non deductible expenses Less: Non taxable revenue Less: Installment sales $ $ $ $ 2017 220,000 $ 40,000$ (14,000) $ 70,000) $ 2018 Remarks 288,000 30,000 Permanent difference (22,000) Permanent difference 14,000 Temporary difference Temporary difference The journal entry for unearned rent is Cash account Dr to Unrearned Rent account Cr. Both are Balance sheet accounts and hence is not part of Financial income. Assuming it is taxable in the year it is received i.e in 2017, therefore added in 2017 to arrive at the taxable income. Further it is assumed (10,000) that it is earned equally in next 2 years i.e $10,000 50,000 (100,000) 250,000 35% 87,500 $ 20,000 Add:Unearned rent Add: Book depreciation Less: Tax depreciation Taxable income Tax rate Tax amount $ $ $ $ $ 196,000 40% 78,400 $ $

Calculation of Deferred tax asset/liability for 2017 Deferred tax Deferred tax Temporary differences Asset(DTA) Liability(DTL) Net DTA/(DTL) Installment sales $ (70,000) $ Unearned Rent $ 20,000 Net Temporary difference for 2017 $ 20,000 $ (70,000) $ Tax rate Net DTL as at year end 2017 -A (70,000) 20,000 (50,000) 40% (20,000) 14,000 (10,000) Calculation of Deferred tax asset/liability for 2018 Deferred tax Deferred tax Temporary differences Asset(DTA) Liability(DTL) Net DTA/(DTL) Reversal of Installment sales $ 14,000 Reversal of Unearned Rent $ (10,000) Excess of Tax depreciation over Book depreciation $ (50,000) $ Net Temporary difference for 2017 $ (10,000) $ (36,000) $ Tax rate Net DTL as at year end 2018-B Deferred tax liability adjustment at end of 2018 (A-B) (50,000) (46,000) 35% (16,100) (3,900)

$ 78,400 Jourmal entries for 2017 Income Tax expense To Income Tax payable (Being income tax liability for 2017) $ 78,400 $ 20,000 $ 20,000 Income Tax expense To Deferred Tax Liability (Being Deferred tax liability recorded at end of 2017) $ 87,500 Jourmal entries for 2018 Income Tax expense To Income Tax payable (Being income tax liability for 2017) $ 87,500 $ 3,900 Deferred Tax Liability To Income tax expense (Being Deferred tax liability adjusted at end of $ 3,900 2018)

Income Statement 2017 220,000 2018 288,000 $ $ Income from Continuing operations before tax Less: Income Tax expense Current Income Tax Deferred Income tax Income after Tax $ $ $ (78,400) $ (20,000) $ 121,600 $ (87,500) 3,900 204,400