Question

1. 2. Problem 19-04 The accounting records of Flounder Inc. show the following data for 2020 (its first year of operations). Life insurance expense on officers was $9,900. Equipment was acquired in early January for $288,000. Straight-line depreciation over a 5-year life is used, with no salvage value. For tax purposes, Flounder used a 30% rate to calculate depreciation. 3. Interest revenue on State of New York bonds totaled $4,300. Product warranties were estimated to be $51,100 in 2020. Actual repair and labor costs related to the warranties in 2020 were $9,300. The remainder is estimated to be paid evenly in 2021 and 2022. Gross profit on an accrual basis was $110,000. For tax purposes, $73,200 was recorded on the installment-sales method. Fines incurred for pollution violations were $4,500. 7. Pretax financial income was $713,600. The tax rate is 30%. 4. 5. 6. Your answer is partially correct. Try again. Prepare a schedule starting with pretax financial income in 2020 and ending with taxable income in 2020. Schedule of Pretax Financial Income and Taxable Income for 2020 Pretax financial income 713600 Permanent differences Bond Interest Revenue 4300 Insurance Expense 9900 Pollution Fines 4500 732300 Temporary differences Depreciation Expense -288000 Installment Sales 73200 Warranty Expense 51100 Taxable income -163700 SHOW LIST OF ACCOUNTS SHOW SOLUTION SHOW ANSWER LINK TO TEXT LINK TO TEXT LINK TO TEXT

Answer 1

Q-1) Calculation

$ Particulars Pretax Financial Income $ 713,600 Permanent differences Interest revenue on state of Newyork bonds (Note-1) Insurance expense Fines incurred for pollution violation (Note-2) (4,300) 9,900 4,500 10,100 723,700 Temporary differences Depreciation (Note-3) Installment - sales method (Note-4) Warranty expenses (Note-5) (28,800) (36,800) 41,800 (23,800) 699,900 699,900 Taxable income

Notes

1.Interest on State of New York bond is not taxed, hence the income has to be reduced from the Accounting income to arrive at taxable income

2.Fines incurred for pollution violation wont be allowed as deduction for tax purposes, hence has to be added back to the Accounting income to arrive at taxable income

3.Depreciation as per the accounting books is lower than that of tax books hence the shortfall of 28,800 has to be reduced from the accounting income to arrive at taxable income

Depreciation (Accounting purpose) Depreciation (Tax (1) purpose) (2) 57,600 86,400 (288,000 / 5 years) (288,000 x 30%) Difference (1-2) (28,800)

4.Only 73,200 of Installment sales can be recognized for tax purposes hence the income of 36,800 over and above the 73,200 should be reduced from the accounting income to arrive at taxable income

5.For tax purposes only the actual cost of warranty can be allowed and the amount provided hence the warranty expense over and above 9,300 should be added back to the Accounting Income to arrive at taxable income

Q-2) Entry

Credit Account title and explantion Income tax expense Debit 209,970 (699,900 x 30%) 7,140 (23,800 x 30%) Deferred tax Asset Income tax payable 217,110 (723,700 x 30%) (To record income tax payable)

Note - A single entry has been passed for deferred tax (summation of deferred tax asset and liability)

Alternate- 2

Credit Account title and explantion Income tax expense Debit 209,970 (699,900 x 30%) 19,680 (65,600 x 30%) Deferred tax Asset Income tax payable Deferred tax Liability 217,110 (723,700 x 30%) 12,540 (41,800 x 30%) 229,650 (To record income tax payable) 229,650

Income tax payable is calculated as the Taxable income as per books (i.e. minus the permanent differences) multiplied by the tax rate; Income tax expense is the taxable income multiplied by the tax rate ; Deferred tax asset/liability is the balancing figure

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