Question

4. Allmond Corporation, organized on January 3, 2018, had pretax accounting income of $20 million and taxable income of $30 million for the year ended December 31, 2018. The 2018 tax rate is 35%. The only difference between accounting income and taxable income is estimated product warranty costs. Expected payments and scheduled tax rates (based on recent tax legislatio) are as follows:

2019       $3 million             30%

2020          2 million            30%

2021          2 million            30%

2022          3 million            20%

Required:

1. Determine the amounts necessary to record Allmond’s income taxes for 2018 and prepare the appropriate journal entry.
2. What is Allmond’s 2018 net income?

Complete this question by entering your answers in the tabs below.

Determine the amounts necessary to record Allmond’s income taxes for 2018. (Enter your answers in millions rounded to 1 decimal place(i.e., 5,500,000 should be entered as 5.5). Enter all amounts as positive values.

	($ in millions)		Tax Rate %		Tax $	Recorded as:
Pretax accounting income	$                      20.0
Warranty costs reversing in:
2019		x		=
2020		x		=
2021		x		=
2022		x		=
Total deferred tax amount					$      0.0
Income taxable in current year	$                    20.0	x		=

Answer 1

Solution:

Particulars	($ in millions)		Tax Rate %		Tax $	Recorded as:
Pretax accounting income	$20.00				$7.80	Income tax expense
Warranty costs reversing in:
2019	$3.00	x	30%	=	$0.90	Deferred tax Assets
2020	$2.00	x	30%	=	$0.60	Deferred tax Assets
2021	$2.00	x	30%	=	$0.60	Deferred tax Assets
2022	$3.00	x	20%	=	$0.60	Deferred tax Assets
Total deferred tax amount					$2.70	Deferred tax Assets
Income taxable in current year	$30.00	x	35%	=	$10.50	Income tax Payable

Journal Entries - Allmond Corporation (In millions)
Date	Particulars	Debit	Credit
31-Dec-18	Income tax expense Dr	$7.80
	Deferred tax asset Dr	$2.70
	To Income taxes payable		$10.50
	(To record income tax expense for the year)

Net income for 2018 = Pretax income - Income tax expense = $20 - $7.80 = $12.20 million.