Question

Omaha Inc. reports $156,000 financial income for 2018, before adjusting the following differences for tax reporting purpose. 1. Pollution fine of $25,000 was paid and recorded. 2. Installment sales result in gross profit recognized for financial reporting purposes in excess of gross profit recognized for tax purposes by $13,000 3. Warranty expenses deducted for financial reporting exceeded warranty costs deducted for income taxes by $10,500. 4. Percentage depletion deducted for income taxes exceeded cost depletion deducted for financial reporting by $32,500. The income tax rate is 25% for 2018, and 20% rate for 2019 and future years.

Answer 1

1.

Pretax Financial Income	$156000
Add:Permanent Diff. of Pollution Fine	$25000
Pretax Financial Income Adjusted	$181000
Add/Less: Temporary Differences
Less: Excess Sales Installment	($13000)
Add: Warranty Excess Deducted	$10500
Less: Reduced Depletion %	($32500)
Taxable Income	$146000
Tax Payable at 25%	$36500
Tax Payable on $181000	$45250
i.e. Deferred Tax Liability (45250-36500)	$8750

Journal Entries

Date	Pariculars	Dr.	Cr.
a	Profit & Loss A/c	36500
	Current Tax A/c		36500
	(Being Current Income Tax Provision Created)
b	Profit & Loss A/c	8750
	Deferred Tax A/c		8750
	( Being Deferred Tax Liability Created)
c	Tax Expense A/c	45250
	Current Tax Payable A/c		36500
	Deferred Tax A/c		8750
	( Being tax Expense Recorded)