Question

Part I: Sass Corp. is in its first year of operation. The company has pretax financial income of $50,000. The company has the following items recorded in its records. No estimated tax payments were made during 2020. Premium of life insurance for its key officers 17,500 Tax depreciation in excess of book depreciation 100,000 Interest on municipal bonds 5,800 Warranty expense 6,500 Actual warranty repairs 4,200 Bad debt expense 2,200 Beginning balance in allowances for uncollectible accounts End balance in allowances for uncollectible accounts 900 Tax rates for 2020 and future years 20% INSTRUCTIONS: (a) Determine taxable income for 2020. (b) Prepare the journal entry to record income taxes for 2020. (c) Prepare the income tax expense section of the income statement for the year ended Dec. 31, 2020.

Answer 1

Note: The given amounts assumed to be not yet adjusted in books while arriving at Pretax Financial Income.

1.   Pretax Financial income = 50,000 $

Adjustments,

- Depreciation as per Tax    =(1,00,000)

- Allowable expenditure

.Employees Life insurance = (17,500)

.Actual Warranty exp = (4,200)

.Bad debts(excludes prov) = (2,200)

+ Interest on Muncipal Bonds = 5,800

Taxable income/(loss) for 2020 = (68,100)

2.As there is Taxable income for 2020, there wont be any tax for the year. Any how ,the following Journal entry has to be passed if tax has been booked.

Tax expense a/c (p and L) - Dr ****

to Tax payable a/c or Bank a/c (impact to BS) ****

3. In the attached Format of the Income statement, Tax expense will show in books of accounts.

Income statement for the Year 2020 Particulars Amount($) Particulars Incomes Direct Incomes Indirect Incomes Total Expenses ** t Cost of Goods consumed Employee Benfits Depreciation Other Indirect expenses * * * Total (income-Expenses) Net Income before taxes Less Provision for Tax Net Income after taxes