You are the new accounting manager at the Barry Transport
Company. Your CFO has asked you to provide input on the company's
income tax position based on the following:
Required:
1. Determine the amounts necessary to record
income taxes for 2018 and prepare the appropriate journal
entry.
2. Assume the enacted federal income tax law
specifies that the tax rate will change from 40% to 35% in 2020.
When scheduling the reversal of the depreciation difference, you
were uncertain as to how to deal with the fact that the difference
will continue to originate in 2019 before reversing the next two
years. Upon consulting PricewaterhouseCoopers' Comperio
database, you found:
.441 Depreciable and amortizable
assets
Only the reversals of the temporary difference at the balance
sheet date would be scheduled. Future originations are not
considered in determining the reversal pattern of temporary
differences for depreciable assets. FAS 109 [FASB ASC 740–Income
Taxes] is silent as to how the balance sheet date temporary
differences are deemed to reverse, but the FIFO pattern is
intended.
You interpret that to mean that, when future taxable amounts are
being scheduled, and a portion of a temporary difference has yet to
originate, only the reversals of the temporary difference at the
balance sheet date can be scheduled and multiplied by the tax rate
that will be in effect when the difference reverses. Future
originations (like the depreciation difference the second year) are
not considered when determining the timing of the reversal. For the
existing temporary difference, it is assumed that the difference
will reverse the first year the difference begins reversing.
Determine the amounts necessary to record income taxes for 2018 and
prepare the appropriate journal entry.
Part 1
General journal |
Debit |
Credit |
Income tax expense |
19.2 |
|
Deferred tax asset ($4 million x 40%) |
1.6 |
|
Deferred tax liability ([$30 + 8 million] x 40%) |
15.2 |
|
Income tax payable ($14 million x 40%) |
5.6 |
Part 2
Liability—Loss contingency – non current assets
Depreciable assets – non current assets
Prepaid insurance - current assets
Deferred tax liability
Classification |
Amount |
Current Liabilities |
3.2 (8*40%) |
Long-Term Liabilities |
10.4 (30*40%)-(4*40%) |
Part 3
General journal |
Debit |
Credit |
Income tax expense |
17.5 |
|
Deferred tax asset ($4 million x 35%) |
1.4 |
|
Deferred tax liability (8*40%)+(30*35%) |
13.7 |
|
Income tax payable ((48-30-9+4)*40%) |
5.2 |
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