Question

The Blaylock Company in year 1 has pretax financial income (Income Before Tax) at the end of 2016 of $610,000.

There are 3 differences between the pretax financial statement and the tax return income as shown below:

3 items were different on Financial Statement compared to Tax Return

            Financial Statement                                                        Tax Return

1. Depreciation “S/L” $10,000                                          $20,000 “accelerated”
2. Percentage of Completion Profit $35,000                 -0- completed contract

c. “Unearned” Revenue of $30,000                                  $30,000 “cash basis”

Required:

1. Prepare a schedule that shows a reconciliation between “F/S” and “T/R”.

2. Complete the schedule to reflect:

     a. Income Tax Expense

     b. Income Tax Payable

    c. Deferred Income Taxes

3. Prepare the year end adjusting entry to record income tax expense, income tax payable and any deferred income taxes.

4. Prepare the income tax expense section of the income statement.

The Blaylock Company in year 2 has pretax financial income (Income Before Tax) at the end of 2016 of $110,000.

There are 4 differences between the pretax financial statement and the tax return income as shown below:

4 items were different on Financial Statement compared to Tax Return

            Financial Statement                                                      Tax Return

1. Depreciation “S/L” $10,000                                        $15,000 “accelerated”
2. Percentage of Completion Profit $10,000                $ 70,000 now completed                                                                                                                       
3. “Earned” Revenue of $30,000                                      -0-
4. “Tax Free” income of $12,000                                     -0- “tax free”

Required:

1. Prepare a schedule that shows a reconciliation between “F/S” and “T/R”.

2. Complete the schedule to reflect:

     a. Income Tax Expense

     b. Income Tax Payable

    c. Deferred Income Taxes

3. Prepare the year end adjusting entry to record income tax expense, income tax payable and any deferred income taxes.

4. Prepare the income tax expense section of the income statement.

Answer 1

Assuming tax rate is 30 %
Income before Tax		610000
Add Back:		40000
Accounting Depreciation	10000
Add: Unearned Revenue recognize in T/R	30000
Deduct:		55000
Tax Depreciation	20000
Profit on contract	35000
Profit as per T/R		595000

Current income tax= Taxable Income * Tax Rate

595000* 30%

Current Income tax expense		178500
Add: Deferred Income tax liability on Depreciation		3000
Less: Deferred Income tax benefit on Unearned Revenue		9000
Add: Deferred Income tax liability on Contract		10500
Income tax expenses , Income statement		183000
		183000	0

Journal entry
Dr. Income tax expenses A/c	183000
Cr. Income tax payable A/C		178500
Cr. Deferred Tax Liability A/C		4500
	183000	183000

The amountn of 178500 is the amount that is to be paid to the government as tax for the year
Tax Reported in the Income statement
Income tax expenses		183000

  

-------------------------------------------------------------------------------------------------------------------------------------------------------------------

Assuming tax rate is 30 %
Income before Tax		110000
Add Back:		80000
Accounting Depreciation	10000
Profit on contract	70000
Deduct:		57000
Tax Depreciation	15000
Earned revenue	30000
Tax Free income	12000
Profit as per T/R		133000

	Current Income tax expense		39900
Add	Deferred Income tax liability on Depreciation		1500
Add	Deferred Income tax benefit on Unearned Revenue		9000
Less	Deferred Income tax liability on Contract		21000	10500
	Income tax expenses , Income statement		29400
			29400
	Journal entry
	Dr. Income tax expenses A/c	29400
	Cr. Deferred Tax Liability A/C	10500
	Cr. Income tax payable A/C		39900
		39900	39900
	The amount of 39900 is the amount that is to be paid to the government as tax for the year
	Tax Reported in the Income statement
	Income tax expenses		29400