Problem 19-2 Year Pretax Financial Income Taxable Income Tax Rate Date Account T
ID: 2399012 • Letter: P
Question
Problem 19-2
Year
Pretax
Financial Income
Taxable Income
Tax Rate
Date
Account Titles and Explanation
Debit
Credit
2017
2018
2019
2020
Problem 19-2
The pretax financial income of Sheridan Company differs from its taxable income throughout each of 4 years as follows.Year
Pretax
Financial Income
Taxable Income
Tax Rate
2017 $318,000 $168,000 35 % 2018 342,000 228,000 40 % 2019 348,000 239,000 40 % 2020 388,000 526,000 40 %Pretax financial income for each year includes a nondeductible expense of $30,600 (never deductible for tax purposes). The remainder of the difference between pretax financial income and taxable income in each period is due to one depreciation temporary difference. No deferred income taxes existed at the beginning of 2017. Prepare journal entries to record income taxes in all 4 years. Assume that the change in the tax rate to 40% was not enacted until the beginning of 2018. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Date
Account Titles and Explanation
Debit
Credit
2017
2018
(To record the adjustment for the increase in the enacted tax rate.) (To record income taxes for 2018.)2019
2020
Prepare the income statement for 2018, beginning with income before income taxes. (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)Sheridan Company
Income Statement (Partial)
December 31, 2018For the Year Ended December 31, 2018For the Quarter Ended December 31, 2018
AdjustmentCurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues
$AdjustmentCurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues
Adjustment Current Deferred Dividends Expenses Income before Income Taxes Income Tax Expense Net Income / (Loss) Retained Earnings, January 1 Retained Earnings, December 31 Revenues Total Expenses Total Revenues
$Adjustment Current Deferred Dividends Expenses Income before Income Taxes Income Tax Expense Net Income / (Loss) Retained Earnings, January 1 Retained Earnings, December 31 Revenues Total Expenses Total Revenues
Adjustment Current Deferred Dividends Expenses Income before Income Taxes Income Tax Expense Net Income / (Loss) Retained Earnings, January 1 Retained Earnings, December 31 Revenues Total Expenses Total Revenues
AdjustmentCurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues
$Explanation / Answer
(a) Before deferred taxes can be computed, the amount of temporary difference originating (reversing) each period and the resulting cumulative temporary difference at each year-end must be computed:
2017
2018
2019
2020
Pretax financial income
$318,000
$342,000
$348,000
($(388,000
Nondeductible expense
30,600
30,600
30,600
30,600
Subtotal
348,600
372,600
378,600
(418,600
Taxable income
168,000
228,000
239,000
526,000
Temporary difference originating (reversing)
$180,600
$144,600
$139,600
(
$(107,400)
Cumulative Temporary Difference At End of Year
2017
$180,600
2018
$325,200
($180,600 + $144,600)
2019
$464,800
($325,200 + $139,600)
2020
$357,400
($464,800 – $107,400)
Because the temporary difference causes pretax financial income to exceed taxable income in the period it originates, the temporary difference will cause future taxable amounts.
Taxable income for 2017...................................................... $168,000
Enacted tax rate for 2017..................................................... 35%
Current tax expense for 2017 (Income taxes payable).. $ 58,800
2017
Income Tax Expense................................................ 122,010
Income Taxes Payable..................................... 58,800
Deferred Tax Liability........................................ 63,210
The deferred taxes at the end of 2017 would be computed as follows:
Temporary Difference
Future Taxable (Deductible) Amounts
Tax Rate
Deferred Tax
(Asset)
Liability
Depreciation
$180,600
35%
$63,210
Deferred tax liability at the end of 2017.............................. $ 63,210
Deferred tax liability at the beginning of 2017................... –0–
Deferred tax expense for 2017 (increase in
deferred tax liability)........................................................... $ 63,210
Deferred tax expense for 2017............................................. $ 63,210
Current tax expense for 2017 (Income taxes payable).... 58,800
Income tax expense for 2017............................................... $122,010
2018
Income Tax Expense................................................ 9,030*
Deferred Tax Liability........................................ 9,030
(To record the adjustment for the
increase in the enacted tax rate)
Income Tax Expense................................................ 149,040
Income Taxes Payable..................................... 91,200
Deferred Tax Liability........................................ 57,840
(To record income taxes for 2018)
*The adjustment due to the change in the tax rate is computed as follows:
Cumulative temporary difference at the end
of 2017............................................................................................ $180,600
Newly enacted tax rate for future years....................................... 40%
Adjusted balance of deferred tax liability
at the end of 2017............................................................................. 72,240
Current balance of deferred tax liability...................................... 63,210
Adjustment due to increase in enacted tax rate........................ $ 9,030
Taxable income for 2018........................................................ $228,000
Enacted tax rate........................................................................ 40%
Current tax expense for 2018 (Income taxes payable)..... $ 91,200
The deferred taxes at December 31, 2018, are computed as follows:
Temporary Difference
Future Taxable (Deductible) Amounts
Tax Rate
Deferred Tax
(Asset)
Liability
Depreciation
$325,200
40%
$130,080
Deferred tax liability at the end of 2018............................... $130,080
Deferred tax liability at the beginning of 2018
after adjustment.................................................................... 72,240
Deferred tax expense for 2018 exclusive of
adjustment due to change in tax rate (increase
in deferred tax liability)........................................................ $ 57,840
Deferred tax expense for 2018.............................................. $ 57,840
Current tax expense for 2018 (Income taxes payable)..... 91,200
Income tax expense (total) for 2018, exclusive
of adjustment due to change in tax rate.......................... $149,040
2019
Income Tax Expense............................................... 151,440
Income Taxes Payable.................................... 95,600
Deferred Tax Liability...................................... 55,840
Taxable income for 2019................................................................ $239,000
Enacted tax rate................................................................................ 40%
Current tax expense for 2019
(Income taxes payable).................................................................. $95,600
The deferred taxes at December 31, 2019, are computed as follows:
Temporary Difference
Future Taxable (Deductible) Amounts
Tax Rate
Deferred Tax
(Asset)
Liability
Depreciation
$464,800
40%
$185,920
Deferred tax liability at the end of 2019............................... $185,920
Deferred tax liability at the beginning of 2019.................... 130,080
Deferred tax expense for 2019 (increase in
deferred tax liability)............................................................ $ 55,840
Deferred tax expense for 2019.............................................. $ 55,840
Current tax expense for 2019 (Income taxes payable)..... 95,600
Income tax expense for 2019................................................. $151,440
2020
Income Tax Expense............................................. 167,440
Deferred Tax Liability............................................. 42,960
Income Taxes Payable.................................. 210,400
Taxable income for 2020........................................................ $526,000
Enacted tax rate........................................................................ 40%
Current tax expense for 2020 (Income taxes payable)..... $210,400
The deferred taxes at December 31, 2020, are computed as follows:
Temporary Difference
Future Taxable (Deductible) Amounts
Tax Rate
Deferred Tax
(Asset)
Liability
Depreciation
$357,400
40%
$142,960
Deferred tax liability at the end of 2020............................... $142,960
Deferred tax liability at the beginning of 2020.................... 185,920
Deferred tax benefit for 2020 (decrease in
deferred tax liability)............................................................. $ (42,960)
Deferred tax benefit for 2020.................................................. $ (42,960)
Current tax expense for 2020 (Income taxes payable)..... 210,400
Income tax expense for 2020................................................. $167,440
(b) 2018
Income before income taxes............................... $342,000
Income tax expense
Current................................................................ $91,200
Deferred............................................................... 57,840
Adjustment due to change in tax rate.......... 9,030 158,070
Net income............................................................... $183,930
2017
2018
2019
2020
Pretax financial income
$318,000
$342,000
$348,000
($(388,000
Nondeductible expense
30,600
30,600
30,600
30,600
Subtotal
348,600
372,600
378,600
(418,600
Taxable income
168,000
228,000
239,000
526,000
Temporary difference originating (reversing)
$180,600
$144,600
$139,600
(
$(107,400)