Question

Dart, Inc. began business on January 1, 2014. Its pretax financial income for the first 2 years was as follows:      

2014    $240,000

              2015    $560,000

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

1. In 2014, the company collected $240,000 of rent; of this amount, $80,000 was earned in 2014; the other $160,000 will be earned equally over the next two years. The full $240,000 was included in taxable income in 2014.
2. Depreciation of property, plant, and equipment for financial reporting purposes amounts to $30,000. Depreciation of these assets amounts to $50,000 for the tax return. The temporary difference due to excess tax depreciation will reverse equally over the next two years.
3. The company pays $10,000 a year for life insurance on officers.
4. In 2015, the company terminated a top executive and agreed to $90,000 of severance pay. The amount will be paid $30,000 per year for 2015–2017. The 2015 payment was made. The $90,000 was expensed in 2015. For tax purposes, the severance pay is deductible as it is paid.

The enacted tax rates existing at December 31, 2014 are:

            2014               30%                              2016               40%

            2015               35%                              2017               40%

Required:

1. Determine taxable income for 2014 and 2015.
2. Determine the deferred income taxes at the end of 2014, and prepare the journal entry to record income taxes for 2014.
3. Prepare the journal entry to record income taxes for 2015.

Answer 1