Question

Problem 19-4 The accounting records of Sweet Inc. show the following data for 2017 (its first year of operations). 1. Life insurance expense on officers was $8,300. 2. Equipment was acquired in early January for $308,000. Straight-line depreciation over a 5-year life is used, with no salvage value. For tax purposes, Sweet used a 30% rate to calculate depreciation. 3. Interest revenue on State of New York bonds totaled $3,600. 4. Product warranties were estimated to be $54,600 in 2017. Actual repair and labor costs related to the warranties in 2017 were $11,000. The remainder is estimated to be paid evenly in 2018 and 2019. 5. Gross profit on an accrual basis was $108,000. For tax purposes, $72,700 was recorded on the installment-sales method. 6. Fines incurred for pollution violations were $3,800. 7. Pretax financial income was $751,800. The tax rate is 30%.

Answer 1

Solution:

Sweet Inc.
Schedule of pretax financial income and taxable income for 2017
Particulars	Amount
Pretax financial Income	$751,800.00
Permanent differences:
Life insurance expense	$8,300.00
Bond Interest Revenue	-$3,600.00
Pollution Fines	$3,800.00
Temporary differences:
Depreciation Expense ($308,000*30% - $308,000/5)	-$30,800.00
Add: Warranty Expense ($54,600 - $11,000)	$43,600.00
Less: Installment Sales ($108,000 - $72,700)	-$35,300.00
Taxable Income	$737,800.00
Income tax (30%)	$221,340.00

Sweet Inc.
Journal Entries
Date	Particulars	Debit	Credit
31-Dec-17	Income tax expense Dr	$228,090.00
	Deferred Tax Assets Dr ($43,600*30%)	$13,080.00
	To Income Tax Payable		$221,340.00
	To Deferred tax liability ($66,100*30%)		$19,830.00
	(Being current income tax and deferred taxes)