Question

Question No. 1 Deferred Taxes Eagle River Inc. reports income before taxes for its first 3 years of operations as follows: Account 2018 2019 2020 Pretax financial income $ 950,000 $ 800,000 1,000,000 The income tax rate is 40%. There were no temporary tax differences with respect to financial reporting and tax returns prior to 2018. For income tax purposes the following differences exist between accounting income and taxable income: 1. For financial reporting Eagle River uses the straight-line depreciation method. For tax purposes Eagle River uses the accelerated depreciation method. The excess depreciation expenses on the tax returns are $30,000 (2018), $40,000 (2019), and $50,000 (2020). 2. Excess warranty expenses in financial income are $20,000 (2018), $10,000 (2019), and $5,000 (2020). Warranty expenses are not deductible for income tax purposes until paid. Required: a. Calculate taxable income for 2018-2020. b. Determine the deferred tax asset and deferred tax liability. c. Prepare the journal entries for 2018-2020. d. Prepare the balance sheet and income statement for 2020.

Answer 1

Part 1

	2018	2019	2020
Pretax financial income	$        950,000	$        800,000	$    1,000,000
Excess depreciation expense on tax return	$        (30,000)	$        (40,000)	$        (50,000)
Excess warranty expense in financial income	$          20,000	$          10,000	$            5,000
Taxable income	$        940,000	$        770,000	$        955,000

Part 2

	2017	2018	2019	Total
Pretax financial income	$        950,000	$        800,000	$    1,000,000
Multiply: Tax Rate	40%	40%	40%
Income Tax Expense	$        380,000	$        320,000	$        400,000
Excess warranty expense in financial income	$          20,000	$          10,000	$            5,000
Multiply: Tax Rate	40%	40%	40%
Deferred Tax Asset	$            8,000	$            4,000	$            2,000	$ 14,000
Excess depreciation expense on tax return	$          30,000	$          40,000	$          50,000
Multiply: Tax Rate	40%	40%	40%
Deferred Tax Liability	$          12,000	$          16,000	$          20,000	$ 48,000
Taxable income	$        940,000	$        770,000	$        955,000
Multiply: Tax Rate	40%	40%	40%
Income Taxes Payable	$        376,000	$        308,000	$        382,000

Part 3

Account title	Debit	Credit
Year	2018
Income Tax Expense	$        380,000
Deferred Tax Asset	$            8,000
Deferred Tax Liability		$          12,000
Income Taxes Payable		$        376,000
Year	2019
Income Tax Expense	$        320,000
Deferred Tax Asset	$            4,000
Deferred Tax Liability		$          16,000
Income Taxes Payable		$        308,000
Year	2020
Income Tax Expense	$        400,000
Deferred Tax Asset	$            2,000
Deferred Tax Liability		$          20,000
Income Taxes Payable		$        382,000

Part 4

Bridgeport Company
Balance sheet
At Dec 31, 2020
Assets
Current assets
Deferred tax asset		$          14,000
Liabilities
Long-term liabilities
Deferred tax liability		$          48,000

Bridgeport Company
Income statement
For the year ended Dec 31, 2020
Pretax financial income		$    1,000,000
Income tax expense
Current Tax	$        382,000
Deferred Tax (20000-2000)	$          18,000
		$        400,000
Net Income		$        600,000