Problem 19-4 1. Prepare a schedule starting with pretax financial income in 2014
ID: 2465984 • Letter: P
Question
Problem 19-4
1. Prepare a schedule starting with pretax financial income in 2014 and ending with taxable income in 2014. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
2. Prepare the journal entry for 2014 to record income taxes payable, income tax expense, and deferred income taxes. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Problem 19-4
The accounting records of Shinault Inc. show the following data for 2014.1. Life insurance expense on officers was $8,300. 2. Equipment was acquired in early January for $305,800. Straight-line depreciation over a 5-year life is used, with no salvage value. For tax purposes, Shinault used a 30% rate to calculate depreciation. 3. Interest revenue on State of New York bonds totaled $5,700. 4. Product warranties were estimated to be $55,300 in 2014. Actual repair and labor costs related to the warranties in 2014 were $14,700. The remainder is estimated to be paid evenly in 2015 and 2016. 5. Gross profit on an accrual basis was $104,300. For tax purposes, $80,100 was recorded on the installment-sales method. 6. Fines incurred for pollution violations were $6,100. 7. Pretax financial income was $795,100. The tax rate is 30%.
Explanation / Answer
Ans-
(a) Schedule of Pretax Financial Income and Taxable Income for 2014 Pretax financial income $ 795,100 Permanent differences Insurance expense $ 8,300 Bond interest revenue $ (5,700) Pollution fines $ 6,100 $ 803,800 Temporary differences Depreciation expense $ (30,580) Installment sales ($104,300 – $80,100) $ (24,200) Warranty expense ($55,300 – $14,700) $ 40,600 Taxable income $ 789,620 * Depreciation for books ($305,800/5) $ 61,160 Depreciation tax return ($305,800 X 30%) $ 91,740 Difference $ 30,580 The income tax payable for 2014 is as follows: Taxable income $ 789,620 Tax rate $ 0 Income tax payable $ 236,886 The computation of the deferred income taxes for 2014 is as follows: Temporary differences Depreciation expense $(30,580) X 30% = $(9,174) DTL Installment sales ($104,300 – $80,100) (24,200) X 30% = (7,260) DTL Warranty expense ($55,300 – $14,700) 40,600 X 30% = 12,180 DTA (b) The journal entry to record income tax payable, income tax expense and deferred income taxes is as follows: Income Tax Expense 241140 Deferred Tax Asset 12,180 Deferred Tax Liability ($9,174 + $7,260) $ 16,434 Income Tax Payable $ 236,886 *Deferred tax expense for 2014 (from deferred tax liability) ($9,000 + $7,500) $ 16,434 Deferred tax benefit for 2014 (from deferred tax asset) $ (12,180) Net deferred tax expense for 2014 $ 4,254 Current tax expense for 2014 (income tax payable) $ 236,886 Income tax expense for 2014 $ 241,140