Question

The following differences enter into the reconciliation of financial income and taxable income of Abbott Company for the year ended December 31, 2017, its first year of operations. The enacted income tax rate is 30% for all years.

         Pretax accounting income                                                                              $800,000

         Excess tax depreciation                                                                                   (480,000)

         Litigation accrual                                                                                                70,000

         Unearned rent revenue deferred on the books but appropriately

               recognized in taxable income                                                                       60,000

         Interest income from New York municipal bonds                                            (20,000)

         Taxable income                                                                                              $430,000

1.   Excess tax depreciation will reverse equally over a four-year period, 2018-2021.

2.   It is estimated that the litigation liability will be paid in 2021.

3.   Rent revenue will be recognized during the last year of the lease, 2021.

4.   Interest revenue from the New York bonds is expected to be $20,000 each year until their maturity at the end of 2021.

Instructions

(a)  Prepare a schedule of future taxable and (deductible) amounts.

(b) Prepare a schedule of the deferred tax (asset) and liability at the end of 2017.

(c)  Since this is the first year of operations, there is no beginning deferred tax asset or liability. Compute the net deferred tax expense (benefit).

(d) Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2017.

Answer 1

(a).

	2018	2019	2020	2021	Total
Future taxable (deductible) amounts:
Depreciation	$120,000	$120,000	$120,000	$120,000	$480,000
Litigation				(70,000)	(70,000)
Unearned rent				(60,000)	(60,000)
Total	$120,000	$120,000	$120,000	(10,000|)	350,000

(b).

	Future Taxable (Deductible)		Deferred Tax
Temporary Differences	Amounts	Tax Rate	(Asset)	Liability
Depreciation	$480,000	30%		$144,000
Litigation	(70,000)	30%	$(21,000)
Unearned rent	(60,000)	30%	(18,000)
Totals			$(39,000)	$144,000

(c).

Deferred tax expense	$144,000
Deferred tax benefit	(39,000)
Net deferred tax expense	$105,000

(d).

Particulars	Debit	Credit
Income Tax Expense ($129,000 + $105,000)	$234,000
Deferred Tax Asset	39,000
Deferred Tax Liability		$144,000
Income Taxes Payable ($430,000 ×30%)		$129,000