Question

(T) Huildil MIUW UILUCU LUMC UA HUU U PILCU UN LU UUUU UH 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) 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 $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

Answer 1

1.

Particulars	2017	2018	2019	2020
Pre tax financial income	2,20,000	2,88,000
Non deductible expense	40,000	30,000
Non taxable revenue	-14,000	-22,000
Unearned rent received	Note 1	10,000	10,000
Instalment sales	-70,000	14,000	32,000	24,000
Depreciation as per tax		-1,00,000	-35,000	-15,000
Depreciation as per Books		50,000	50,000	50,000
Taxable income	1,76,000	2,70,000	57,000	59,000
Tax rates	40%	35%	32%	30%
Tax	70,400	94,500	18,240	17,700

Note 1 - Unearned rent received is not deducted from financial income of 2017 since it is assumed that correct journal entry (see below) for the same has been passed, hence no adjustment required.

Cash A/c…..Dr	20000
To Unearned rent received A/c		20000

2.

	2017
	Debit ($)	Credit ($)
Income Tax A/c	70400
To Income tax payable A/c		70400
Income tax payable A/c	70400
To Cash A/c		70400
Deferred Tax Expense A/c	28000
To Deferred tax Liability		28000
(Being Deferred tax Liability created on installment sales of 70000$ @ 40%)

3 & 5.

			2017	2018
Income from continuing operations before income taxes			2,20,000	2,88,000
Add: Depreciation			50,000	50,000
Less: Instalment sales incorrectly posted			-70000
Add: Instalment sales recorded and realized				14000
Add: Unearned rent realized				10000
			2,00,000	3,62,000
Less: Depreciation			-50000	-50000
			1,50,000	3,12,000
Less: Tax			-70,400	-94,500
Profit after tax			79,600	2,17,500

4.

	2018
	Debit ($)	Credit ($)
Income Tax A/c	94,500
To Income tax payable A/c		94,500
Income tax payable A/c	94,500
To Cash A/c		94,500
Deferred tax Liability	4900
To Deferred Tax Expense A/c		4900
(Being timing difference on instalment sales reversed to the extent of $14000@35%)
Deferred Tax Expense A/c	17500
To Deferred tax Liability A/c		17500
(Being Deferred tax Liability created on timing difference of Depreciation to the extent of $50000@35%)

Please note: No Deferred tax asset or liability shall be created on non-deductible expense and non-taxable revenue since these are non-reversible differences.