Question

Yarman Inc. began business on January 1, 2017. Its pretax financial income for the first 2 years was as follows:

2007 240,000

2008 560,000

The following items caused the only differences between pretax financial income and taxable income.

1. In 2017, the company collected 180,000 of rent; of this amount, 60,000 was earned in 2017; the other 120,000 will be earned equally over the 2018-2019 period. The full 180,000 was included in taxable income in 2017.

2. The company pays 10,000 a year for life insurance on officers.

3. In 2018, the company terminated a top executive and agreed to 90,000 of severance pay. The amount will be paid 30,000 per year for 2018-2021. The 2018 payment was made. The 90,000 was expensed in 2018. For tax purposes, the severance pay is deductible as it is paid.

The enacted tax rates existing at December 31, 2017 are:

2017 30%    2019 40%

2018 35%    2021   40%

Instructions

(a) Determine taxable income for 2017 and 2018.

	2017	2018
Pretax financial income
Permanent differences:
Life insurance
Temporary differences:
Rent
Severance pay
Taxable income

(b) Determine the deferred income taxes at the end of 2017, and prepare the journal entry to record income taxes for 2017.

	2018	2019	Total
Future taxable(deductible) amounts:
Rent			2
Tax Rate	35%	40%
Deferred tax(asset) liability
Income Tax Expense
Deferred Tax Asset
Income Tax Payable

(c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2018.

	2019	2020	Total
Future Taxable(deductible) amounts:
Rent	(60,000)		(60,000)
Severance pay	(30,000)	(30,000)	(60,000)

(d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2018.

Temporary Difference	Future Taxable(Deductible) Amounts	Tax Rate	Deferred Tax(Asset)	Liability
Rent		40%
Severance pay		40%
Totals

(e) Compute the net deferred tax expense (benefit) for 2018.

Deferred tax asset at end of 2018
Deferred tax asset at beginning of 2018
Net deferred tax(expense) for 2018

(f) Prepare the journal entry to record income taxes for 2018.

Income Tax Expense
Deferred Tax Asset
Income Tax Payable

(g) Show how the deferred income taxes should be reported on the balance sheet at December 31, 2018.

Current assets
Deferred tax asset
Other assets
Deferred tax assets

Answer 1

(a)		2017	2018
	Pretax financial income	$240,000	$560,000
	Permanent differences:
	Life insurance	10,000	10,000
		250,000	570,000
	Temporary differences:
	Rent	120,000	-60,000
	Severance pay	-0-	60,000
	Taxable income	$370,000	$570,000
(b)		2018	2019	Total
	Future taxable (deductible) amounts:
	Rent	($60,000)	($60,000)	($120,000)
	Tax rate	35%	40%
	Deferred tax (asset) liability	($21,000)	($24,000)	($45,000)
	Income tax expense(111000-45000)	66000
	deferred tax asset	45000
	income tax payable(370000*30%)		111000
c)		2018	2019	Total
	Future taxable (deductible) amounts:
	Rent	($60,000)	$0	($60,000)
	Tax rate	$   (30,000.00)	$   (30,000.00)	($60,000)
d)			Future Taxable
		(Deductible)	Tax	Deferred Tax
	Temporary Difference	Amounts	Rate	(Asset)	Liability
	Rent	($60,000)	40%	($24,000)
	Severance pay	-60,000	40%	-24,000
	Totals	($120,000)		($48,000)
e)	Deferred tax asset at end of 2018	($48,000)
	Deferred tax asset at beginning of 2018	-45,000
	Net deferred tax (expense) for 2018	($3,000)
f)	Income Tax Expense ($199,500 – $3,000)	196,500
	Deferred Tax Asset	3,000
	Income Tax Payable ($570,000 × 35%)		199,500
g)	Current assets
	Deferred tax asset ($90,000× 40%)	$36,000
	Other assets
	Deferred tax asset ($30,000 × 40%)	$12,000
	notes
	$60,000 + $30,000=90000