Question

The following differences apply to the reconciliation of accounting income and taxable income of Gatsby Inc. for calendar 2018, its first year of operations. The enacted income tax rate is 30% for all years.

Accounting income $440,000 Differences:

Excess CCA (220,000)

Lawsuit accrual 30,000

Unearned rent revenue deferred on the books but correctly included in taxable income 20,000

Dividend income from Canadian corporations (12,000)

Taxable income $258,000 1.

Excess CCA will reverse equally over a four-year period, 2019–2022.

2. It is estimated that the lawsuit accrual will be paid in 2022.

3. Unearned rent revenue will be recognized as earned equally over a four year period, 2019– 2022.  

c)Since this is the first year of operations, there is no beginning deferred tax asset or liability. Calculate the net deferred tax expense (benefit) for 2018

d) Prepare journal entries to record income tax expense, deferred taxes, and income taxes payable for 2018.

Answer 1

Computation of Net Deferred Tax Expense(Benefit) for year 2018 :

Deferred Tax Expenses - $66,000

Deferred Tax Benefit - ($15,000)

Net Deferred Tax Expenses- $51,000

Computation Of Income Tax Payable-

Taxable Income - $258000

Tax Rate - 30%

Tax Payable- $258000*30/100 = $77400

Journal Entries to record Income Tax expense, Deferred Tax and Income Tax Payable:

Particulars Amount

Income Tax Expense A/c Dr.($77400+ $51000) $128400

Deferred Tax Asset A/c Dr. $15000

To, Deferred Tax Liability A/c $66000

To, Income Tax Payable A/c($258000*30/100) $77400

  

Working Notes:-

Future Taxable(Deductible) Tax Rate Deferred tax

Temporary Differences Amount   (Asset) Liability

Excess CCA $220000 30% $66000

Unearned Rent Revenue ($20000) 30% ($6000)

Lawsuit Accrual ($30000) 30% ($9000)

Total $170000 ($15000) ($66000)