Problem 19-3 The following information has been obtained for Pharoah Corporation
ID: 341645 • Letter: P
Question
Problem 19-3 The following information has been obtained for Pharoah Corporation. 1. Prior to 2017, taxable income and pretax financial income were identical. 2. Pretax financial income is $1,575,000 in 2017 and $1,425,000 in 2018. 3. On January 1, 2017, equipment costing $1,200,000 is purchased. It is to be depreciated on a straight-line basis over 5 years for tax purposes and over 8 years for financial reporting purposes. (Hint: Use the half-year convention for tax purposes, as discussed in Appendix 11A.) 4. Interest of $54,000 was earned on tax-exempt municipal obligations in 2018. 5. Included in 2018 pretax financial income is a gain on discontinued operations of $183,000, which is fully taxable. 6. The tax rate is 35% for all periods. 7. Taxable income is expected in all future years. Compute taxable income and income taxes payable for 2018. Taxable income Income taxes payable$ Prepare the journal entry to record 2018 income tax expense, income taxes payable, and deferred taxes. (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.) Account Titles and Explanation Debit CreditExplanation / Answer
ompute taxable income and income tax payable for 2018 Pretax financial income in 2018 $1,425,000 Add: Depreciation as per financail $150,000 $1200000/8 years Less: Depreciation for Tax Purpose $1200000/ 5 years = 240000 Half dep considered for tax $120,000 $240000/2 Net Taxable Income 2018 $1,455,000 ( 1425000+150000-120000) Income Tax payable $509,250 ( 1455000*35%) Working Note It assume that’s intrest of $54000 earned from municipal obligation not included in pre tax income hense not considered Gain from discontinued operation are allready included hense no treatment required Calculation of Deffered Tax As Depreciation for income tax purpose is less than financial depreciation hense we have paid more tax in current and same benefit will be allowed in future as deffered tax assets Depreciation as per financial reporting $150,000 Depreciation as per Income tax $120,000 Net Differences ( 150000-120000) $30,000 Tax rate 35% Deffered tax Assets ( 30000*35%) $10,500 Journal Entries Profit and loss a/c dr $509,250 To Income tax expense a/c $509,250 ( Being provision for income tax made) Income Tax Expenses a/c Dr $509,250 To Cash/ bank a/c $509,250 (Being Income tax expenses paid) Deffered tax assets A/c Dr $10,500 To profit & loss a/c $10,500 ( Being deffered tax assets created) Income Statement of pharoah's 2018 Income from Continuing operation before tax $1,242,000 ( 1425000-183000) Add: gain from discontinuing operation $183,000 Net income before tax $1,425,000 Less: Income tax expenses $509,250 Net Income after tax $915,750 Add: Defered tax assets $10,500 Net Income transfer to Reserve & Supluse $926,250 Deffered Tax Assets shown in balance sheet 31 dec 2018 $21,000 ( Deffered tax 10500+ 10500 for 2017 & 2018)