Question

Teal Inc., in its first year of operations, has the following differences between the book basis and tax basis of its assets and liabilities at the end of 2016.

	Book Basis	Tax Basis
Equipment (net)	$364,000	$304,000
Estimated Warranty Liability	$192,000	$0

It is estimated that the warranty liability will be settled in 2017. The difference in equipment (net) will result in taxable amounts of $ 19,100 in 2017, $ 30,600 in 2018, and $ 10,300 in 2019. The company has taxable income of $ 470,000 in 2016. As of the beginning of 2016, the enacted tax rate is 34% for 2016–2018, and 30% for 2019. Teal expects to report taxable income through 2019.

Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016.

Indicate how deferred income taxes will be reported on the balance sheet at the end of 2016.

Answer 1

a. The pretax financial income is calculated below:

Taxable income	$470,000
Different of equipment base ($364,000 - $304,000)	60,000
Warranty expense	(192,000)
Pretax financial income	$338,000

Accounts title and explanation	Debit	Credit
Income tax expenses ($338,000 x 34%)	$114,920
Deferred tax expenses (192000 x 34%)	$65,280
Deferred tax liabilty (60,000 x 34%)		$20,400
Income tax payable (470000 x 34%)		$159,800
(To record income tax expense, deferred income taxes, and income tax payable)

b.

Balance sheet (Partial)
Other non current asset:
Deferred tax asset	$65,280
Current liability
Income tax payable	$159,800
Other non current liability
Deferred tax liability	$20,400