Question

Oriole Co. at the end of 2021, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:

Pretax financial income $390,000

Extra depreciation taken for tax purposes (1,002,000)

Estimated expenses deductible for taxes when paid 860,000

Taxable income $248,000

Use of the depreciable assets will result in taxable amounts of $334,000 in each of the next three years. The estimated litigation expenses of $860,000 will be deductible in 2024 when settlement is expected.

Prepare a schedule of future taxable and deductible amounts.

Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2021, assuming a tax rate of 25% for all years.

Answer 1

a). Preparing a schedule of future taxable or deductible amounts:

	2022	2023	2024	total
Future taxable/(deductible) amount:
Extra depreciation	$334,000	$334,000	$334,000	$1002,000
Litigation			($950,000)	($950,000)

b).

Journal entries:

S. No	accounts title & explanation	Debit($)	credit($)
1	Income tax expense	97,500
	($248,000+$1002,000-$860,000)*25%
	Deferred tax asset	215,000
	($ 860,000*25%)
	Deferred tax liability		250,500
	(1002000*25%)
	Income tax payable		62,000
	(248,000*25%)