Question

The pretax financial income of Flounder Company differs from its taxable income throughout each of 4 years as follows.

Year		Pretax Financial Income		Taxable Income		Tax Rate
2017		$305,000		$173,000		35	%
2018		349,000		216,000		40	%
2019		358,000		277,000		40	%
2020		429,000		615,000		40	%

Pretax financial income for each year includes a nondeductible expense of $29,100 (never deductible for tax purposes). The remainder of the difference between pretax financial income and taxable income in each period is due to one depreciation temporary difference. No deferred income taxes existed at the beginning of 2017.

Prepare journal entries to record income taxes in all 4 years. Assume that the change in the tax rate to 40% was not enacted until the beginning of 2018. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Prepare the income statement for 2018, beginning with income before income taxes. (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

List of Accounts

• Allowance to Reduce Deferred Tax Asset to Expected Realizable Value
• Benefit Due to Loss Carryback
• Benefit Due to Loss Carryforward
• Deferred Tax Asset
• Deferred Tax Liability
• Income Tax Expense
• Income Tax Payable
• Income Tax Refund Receivable
• No Entry

ONLY USE ABOVE ACCOUNTS

SHOW WORK

FOLLOW FORMAT ABOVE

THANK YOU!

Date Account Titles and Explanation Debit Credit 2017 2018 (To record the adjustment for the increase in the enacted tax rate.) (To record income taxes for 2018.) 2019 2020 Flounder Company Income Statement (Partial)

Answer 1

Solution 1:

Computation of Taxable /(Reversal) Temporary differences
Particulars	2017	2018	2019	2020
Pretax financial income	$305,000.00	$349,000.00	$358,000.00	$429,000.00
Add: Non deductible expenses	$29,100.00	$29,100.00	$29,100.00	$29,100.00
Less: Taxable Income	$173,000.00	$216,000.00	$277,000.00	$615,000.00
Taxable Temporary (Reversible) differences	$161,100.00	$162,100.00	$110,100.00	-$156,900.00

Journal Entries - Flounder Company
Date	Particulars	Debit	Credit
2017	Income tax expense Dr	$116,935.00
	To Income tax payable ($173,000*35%)		$60,550.00
	To Deferred tax liability ($161,100*35%)		$56,385.00
	(To record income tax expense)
2018	Income tax expense Dr	$8,055.00
	To Deferred tax liability ($161,100*5%)		$8,055.00
	(To record the adjustment for the increase in enacted tax rate)
2018	Income tax expense Dr	$151,240.00
	To Income tax payable ($216,000*40%)		$86,400.00
	To Deferred tax liability ($162,100*40%)		$64,840.00
	(To record income tax expense)
2019	Income tax expense Dr	$154,840.00
	To Income tax payable ($277,000*40%)		$110,800.00
	To Deferred tax liability ($110,100*40%)		$44,040.00
	(To record income tax expense)
2020	Income tax expense Dr	$183,240.00
	Deferred Tax Liability Dr ($156,900*40%)	$62,760.00
	To Income tax payable ($615,000*40%)		$246,000.00
	(To record income tax expense)

Solution 2:

Flounder Company
Income Statement (Partial)
Particulars		Amount
Pretax financial income		$429,000.00
Income tax expense:
Current tax	$86,400.00
Deferred Tax - Increase in tax rate	$8,055.00
Deferred tax	$64,840.00
		$159,295.00
Net Income		$269,705.00