Question

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 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, depreciation expense is as follows: 2018 S100,000 2019 35,000

Answer 1

A particulars 2014 Pretax financial income $ 20.000 Add: Non deductable & 40.000 expenses less: Nontorale & (14.000) slovence Less: Instalment (70,000 Sales 2018 Remoaks $289,000 & 30.000 Permanent differences & (22.000) Permanent difference $14.000 Temporary difference The journal entry for Onearned sent is cash account Drto on earned Rent account G. Both are Balance sheet accounts and hence is not part of financial income. Assuming it is taxable in the year is dreceived ie in ault, therefore added in adt to arrive at the taxable income farther it is $ 10,000 asumed that is loved ecoudly in next years ie 90,000 10,000 $ (loo,000 $0.000 35% Add: On camned rent Jo.000 Add : Book depreciation Cess: Tax depreciation Exable incomo $196000 Tax rate 40% Tan amount Tax amount s 78,OO $ 87, SOO Net DEACOIL) Calculation of Defaxed tax ass.et/ liability for dolz Temporary differences / Deferred tax I Deterredfar. AssetCoia) I Liability Coll) Installment sales $ 170.000 creamed Rent $ 120.000 en ( 106000 est C201000) met temporary difference | for 2017 $ 20,000 & 70.000 et 50,000 tax rate Net DTL as at year end 2014-d 401, § 690,000)

(DIA COTL Galculation of Deferred tax assotiability for dole Temporary differces Deferred tar dssett Deterreo tarliability wet DIA/CDTL) 14-000 47000) Reversal of Installment sales (10,000) Reveral of onearned pont C10.000) Excess of far depredaction over Ś ($0.000) § 501000) book depreciation (36.000 Ž (10.000) g wet temporary diff for doly (46,000) Tox rate Net OTL as at geen end 2018-B § (16.100) Deferred tax liability adjustment at end of 2018 (A-B) $ 3,900) 337,

Journal entries for aolit Incomtax expense To income Tax Payable (Being income tax liability for action) 78,000 $ 78,400 $ 30.000 income taxe penge to deferred $ 20,000 tax liability (Being doferred tax liability roorded at end of 2017 Joernal entries for 2018 Income tax expenso 87,500 To Income tax Payable (Being income tax liability for 2017) Deferred Tax Ciability $ 3.900 of neona tоқ еxреле Being Deferred tax liability adjusted at end of 2018) $ 87,500 $ 3.900 2011 2018 $ 220,000 $ 286 Income statement Income from confineering operations before tax less: Income taxexpense Current income tax Deferred Income tax $078,400) $ (87,500 ) > Cao) (2 Ro6) Income aftex fox $ 121600 $ 204,400