Question

(Income Taxes) The following information is available for Potter Corporation for 2017. 3. a. Depreciation reported on the tax return exceeded depreciation reported on the income statement by $75,000. This difference will reverse in equal amounts of $25,000 over the years 2018-2020. b. Interest received on municipal bonds was $24,000. c. Rent collected in advance on January 1, 2017, totaled $45,000 for a 3-year period. Of this amount, $30,000 was reported as unearned at December 31, 2017, for book purposes d. The tax rates are 30% for 2017 and 40% for 2018 and subsequent years. e. Income taxes of $270,000 are due per the tax return for 2017. f. No deferred taxes existed at the beginning of 2017 Instructions a. Compute taxable income for 2017 b. Compute pretax financial income for 2017 c. Prepare the journal entries to record income tax expense, deferred income taxes, and income taxes payable for 2017 and 2018. Assume taxable income was $760,000 in 2018. d. Prepare the income tax expense section of the income statement for 2017, beginning with "Income before income taxes."

Answer 1

Answer:

a. Taxable income for 2017 = Income tax due / tax rate = $270000/ 30% = $900,000

b.

Taxable income	$900,000
Permanent differences:
Interest on Municipal Bonds	$24,000
Temporary Differences:
Excess Depreciation	$75,000
Unearned Rent	-$30,000
Pretax Financial Income	$969,000

c. Journal

Year	Account Name	Debit	Credit
2017	Income tax expense	$328450
	Deferred tax assets ($30,000 x 40%)	$12000
	Deferred tax liabilities ($75,000x 40%)		30000
	Income tax payable ($900,000x 30%)		$270000
	(To record income tax expense, deferred income taxes, and income taxes payable)
2018	Income tax expense	$302500
	Deferred tax liabilities ($18750 x 40%)	$7500
	Deferred tax assets ($15000 x 40%)		$6000
	Income tax payable ($760000 x 40%)		$304000
	(To record income tax expense, deferred income taxes, and income taxes payable)

d.

Pearl Corporation
Income Statement (Partial)
Income before income taxes		$969,000
Income tax expense
current	270000
Deferred (30000-12000)	18000
		($288,000)
Net Income		$681,000