Question

In its first year of operations, Julia Towers Enterprise. reported the following information:

(a) Income before income taxes was $620,000.

(b) The company acquired capital assets costing $1,800,000; depreciation was $120,000 and CCA was $90,000.

(c) The company recorded an expense of $125,000 for the one-year warranty on the company's products; cash disbursements amounted to $77,000.

(d) The company incurred development costs of $75,000 that met the criteria for capitalization for accounting purposes. Development work was still ongoing at year-end. These costs could be immediately deducted for tax purposes.

(e) The company made a political contribution of $20,000 and expensed this for accounting purposes.

(f) The income tax rate was 28% and the year 2 tax rate was enacted, at 30%.

In the second year, the company reported the following:

(a) Earnings before income tax were $1,600,000.

(b) Depreciation was $120,000; CCA was $260,000

(c) The estimated warranty costs were $200,000, while the cash expenditure was $205,000.

(d) Additional development costs of $150,000 were incurred to complete the project. For accounting purposes, amortization of $38,000 was recorded.

(e) Golf club memberships for top executives cost $25,000; this was expensed for accounting purposed as a marketing expense.

1. Prepare the journal entries to record income tax expense for the first and second years of operations.

2. Explain the tax rate used to determine deferred income tax in the first year.

Answer 1

1.

2. The tax used to determine the deffered income tax in the first is 28% on $410,000.