Question

Grouper Company began operations at the beginning of 2021. The following information pertains to this company. 1. Pretax financial income for 2021 is $110,000. 2. The tax rate enacted for 2021 and future years is 20%. 3. Differences between the 2021 income statement and tax return are listed below: (a) Warranty expense accrued for financial reporting purposes amounts to $7,000. Warranty deductions per the tax return amount to $2,200. (b) Gross profit on construction contracts using the percentage-of-completion method per books amounts to $95,400. Gross profit on construction contracts for tax purposes amounts to $65,300. (c) Depreciation of property, plant, and equipment for financial reporting purposes amounts to $54,300. Depreciation of these assets amounts to $73,100 for the tax return. (d) A $3,500 fine paid for violation of pollution laws was deducted in computing pretax financial income. (e) Interest revenue recognized on an investment in tax-exempt municipal bonds amounts to $1,300. 4. Taxable income is expected for the next few years. (Assume (a) is short-term in nature; assume (b) and (c) are long-term in nature.) Compute taxable income for 2021. Taxable income for 2021 $ Compute the deferred taxes at December 31, 2021, that relate to the temporary differences described above. Deferred tax liability $ Deferred tax asset $

Answer 1

Compute Taxable income for 2021 Compute Taxable income for 2021 $ 130,600 (Note 1) Deferred tax liability Deferred tax Asset $ $ 9,780 (Note 2) 960 (Note 2) Credit Debit $ Journal Entry Account title and Explanation Income Tax Expenses Deferred Tax Asset Income Tax Payable Deferred Tax Liability (To record income tax expenses) 34,940 960 $ $ $ 26,120 9,780 Grouper Company Income Statement (Partial) For the year ending 2021 Net income before tax Income tax expenses Income tax payable $ 26,120 Deferred tax expenses $ 8,820 $ 111,000 $ $ 34,940 76,060 Net Income

Note 1: Calculation of Taxable income Amount Amount $ 111,000 $ 7,000 $ 95,400 54,300 3,500 $ $ 160,200 Pre-tax Financial Income Add: warranty expenses as per Financial reporting Gross profit on Construction as per financial reporting Depreciation for financial reporting Fine on Violation of Pollution Less: warranty expenses for taxation Gross profit on Construction as per taxation Depreciation for taxation Taxable income Tax Rate Tax Liability $ $ 2,200 65,300 73100 $ 140,600 $ 130,600 20% $ 26,120 payment made for violation of any law for time being in force is not allowed as expenses

Note 2: Calculation of deferred tax asset / (Liability) As per Warranty Expenses Gross profit on Construction Contract Depreciation Deferred Tax Asset/ (Liability) As per Financial Temporary Short Term Long Term Reporting Income tax difference at 20% at 20% $ 7,000 $ 2,200 $ 4,800 $ 960 $ 95,400 $ 65,300 $ (30,100) $ (6,020) $ 54,300 $ 73,100 $ (18,800) $ (3,760) $ 960 $ (9,780) Claiming of expenses as per income tax less as compared to Books creates future deferred tax asset on the other hand claiming of expenses more than Books creates future tax liability. Recognition of lower revenue for tax purpose results in future tax liability.