Question

21 pts Shimmer Inc. began operations in 20x2. The company sometimes sells used equipment on an installment basis. In those cases, Shimmer reports income in its income statement in the year of the sale. In its income tax return, though, the company reports installment income when it collects the cash. Installment income in 20x2 was $60,000, which the company expects to collect equal y over the next three years beginning with 20x3. The tax rte is 25%, but based on an enacted law will become 30% in 20x In addition, the company extends warranties to its customers. The estimated warranty costs accrued for GAAP in 20x2 were $15,000 and actual warranty claims paid in 20x2 were $3,000. The company expects to pay the remaining warranty claims as follows: $6,000 in 20x3; $4,000 in 20x4: $2,000 in 20x5. Shimmer's pretax accounting income from the 20x2 income statement was $94,000 and from the 20x3 income statement $12,000, which includes $40,000 of interest revenue from an investment in municipal bonds each year and only in 203 $5,000 in penalties were assessed for late filing of the company's payroll returns. There were no differences between accounting income and taxable income other than those described above. -Assume the company always carries back net operating losses, f incurred. Required 1) Prepare the journal entries to record income taxes at the end of 20x2. Put DR and CR by your entries so I can follow them. 2) Prepare the journal entries to record income taxes at the end of 20x3. Put DR and CR by your entries so I can follow them. Please remember to show your work so I can give you partial credit HTML Editor

Answer 1

Given information:
Instalment income:	20x2 ($)	20x3 ($)	20x4 ($)	20x5 ($)
As per Accounting records	60000
Expected collections		20000	20000	20000
Tax rate	25%	30%
Warranties:
As per GAAP	15000
Actual warranty claims payments	3000	6000	4000	2000
Pretax accounting income	94000	12000
Interest on muncipal bonds included in pretax income	40000	40000
Penalties for late filing		5000

Calculation of taxable income and tax liability:
Particulars	Amount ($)	Amount ($)
Pretax accounting income	94000	12000
Add: Incomes taxable and expenses inadmissible
Collections on instalment sales	0	20000
Warranty expenses	15000
Penalties (inadmissible)		5000
Less: Expenses admissible and Incomes non-taxable
Collections on instalment sales	60000
Warranty expenses	3000	6000
Interest on muncipal bonds (exempt)	40000	40000
Taxable income	6000	-9000
Tax rate	25%	30%
Tax liability	1500	-2700

	Journal entries to record income taxes payable	Debit ($)	Credit ($)
1 - 12/31/20x2	Income tax expense	1500
	Income tax payable		1500
	To record the income tax liability for the year
	Income tax payable	1500
	Cash		1500
	To record payment of income taxes
2 - 12/31/20x3	Income tax receivable	2700
	Income tax (gain)		2700
	To record income tax receivable due to negative taxable income
	This income tax receivable can be set off with future tax liabilities. Entry for the same is Income tax expense (Dr) Income tax receivable (Cr)