Question

At the end of 2015, Dolf Company prepared the following schedule of its deferred tax items (based on the currently enacted tax rate of 30%):

Deferred Tax Item #	Account Balance	Related Asset or Liability causing the deferred tax item
1	$ 8,400 debit	Current asset
2	10,200 debit	Noncurrent asset
3	5,700 credit	Current liability
4	17,700 credit	Noncurrent liability

On April 30, 2016, Congress changed the income tax rate to 40% for 2016 and future years. At the end of 2016, Dolf reported taxable income of $62,500 for 2016. At that time, Dolf determined that its deferred tax items should have balances as follows at the end of 2016 (based on the 40% tax rate): #1, $10,700 debit; #2, $15,000 debit; #3, $7,000 credit; #4, $25,900 credit.

Required:

1.	Show how the deferred tax items are reported on Dolf’s December 31, 2015, balance sheet.
2.	Prepare the April 30, 2016, journal entry to correct Dolf’s deferred tax items.
3.	Prepare Dolf’s income tax journal entry at the end of 2016.
4.	Show how the current and deferred tax items are reported on Dolf’s December 31, 2016, balance sheet.
5.	Calculate the total income tax expense for 2016.

CHART OF ACCOUNTS
Dolf Company
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 141 Inventory 152 Prepaid Insurance 161 Deferred Tax Asset (#1) 162 Deferred Tax Asset (#2) 163 Deferred Tax Asset (#3) 164 Deferred Tax Asset (#4) 181 Equipment 198 Accumulated Depreciation LIABILITIES 211 Accounts Payable 231 Salaries Payable 250 Unearned Revenue 261 Income Taxes Payable 262 Deferred Tax Liability 263 Deferred Tax Liability (#1) 264 Deferred Tax Liability (#2) 265 Deferred Tax Liability (#3) 266 Deferred Tax Liability (#4) EQUITY 311 Common Stock 331 Retained Earnings	REVENUE 411 Sales Revenue EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 541 Depreciation Expense 559 Miscellaneous Expenses 910 Income Tax Expense

2. Prepare the April 30, 2016, journal entry to correct Dolf’s deferred tax items. Additional Instruction

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5

3. Prepare Dolf’s income tax journal entry on December 31, 2016. Additional Instruction

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6

Labels
Current Liabilities
Noncurrent Liabilities

1. Show how the deferred tax items are reported on Dolf’s December 31, 2015, balance sheet. Additional Instructions

Dolf Company

Partial Balance Sheet

December 31, 2015

1
2

4. Show how the current and deferred tax items are reported on Dolf’s December 31, 2016, balance sheet. Additional Instructions

Dolf Company

Partial Balance Sheet

December 31, 2016

1
2
3
4

5. Calculate the total income tax expense for 2016.

$ ________

Answer 1

1) Pre-tax income from continuing operations -143000-30000-16000+10000+8000 $115,000 Taxable income from continuing operations 123000-30000-16000+10000+8000 $95,000 If taxable income is not equal to pre-tax financial income because of temporary differences, the total income tax expense is sum of income tax payable and adjustments to deferred tax liabilities and assets. Income tax payable -Taxable income * tax rate (50000 * 15%)+(45000*30%) -$21,000 DTL for 2016 14000-8100

$6000 Income tax expense from continuing operations 21000+6000 - $27,000

Debit ($) Credit ($) Particulars 2 Date 3 42900 Dec, 2016 Income tax expense (143000*30%) 4 Income tax payable (123000*30%) DTL 36900 6000 6 Net income Revenue -Expense Particulars Revenue Expenses (295000-115000 Pretax income from continuing operations income tax expense (7500+19500) income from continuing operations Results of discontinued operation Gain from disposal of discontinued Division B (16000-4800) Loss from opeartions of discontinued Division B (10000-3000) 3) Amount ($) 295000 180000 115000 27000 88000 10 12 13 14 15 16 17 18 19 20 21 11200 Income before extraordinary loss Extraordinary gain (30000-9000) net income 7000 4200 92200 21000 113200

24 25 4) 26 27 28 29 30 31 32 Amount ($) Particulars Retained earnings as on Jan 1,2016 Less: prior period adjustment Adjustment retained earnings Add: net income 310000 5600 304400 113200 417600 -48000 369600 Less: Cash dividends during 2016 retained earnings as on 31-12-2016 5) In the balance sheet ending DTL of $14,100 will be shown as noncurrent DTL as 34 DTL relates to depreciation on assets, which are not current assets 35