Question

Winter Gear, Inc. started business on January 1, 20X1. The company uses the income statement approach...

Winter Gear, Inc. started business on January 1, 20X1. The company uses the income statement approach to estimating bad debts. The company incorrectly used the actual write-off of the receivable for the recorded bad debt expense in the below income statement.

Credit sales $678,000
Bad debt expense as a percentage of sales 2%
Write-off of accounts receivable $1,000
Tax rate 30%
Estimated tax payment $31,000

Incorrect income statement, for the year ended December 31:

Sales $678,000
Expenses 549,200
Bad debt expense 1,000
Pretax income 127,800
Tax expense 38,340
Net income 89,460

Assuming estimated tax payment of $31,000 what is ending balance in taxes payable in 20X1 on the balance sheet?

Homework Answers

Answer #1
Particulars Amount Particulars Amount
Tax payment 38,340 Tax Payable 31,000
Balance c/d 7340
Total 38,340 Total 38340

Closing Balance is deferred tax asset of 7340

This is arrived at as actual Tax Payment compared to the actual Tax liability. The payment being more than the actual liability due the IRS implies we have paid in excess, and thus we have an asset (upfront Payment) on future tax Liabilities.

Explanation:

Taxes Payable is a function of the operating Profit of the company

And operating profit (Also referred to as Earnings Before Tax - EBT) is arrived at by deducting from sales all related expenses as well as Costs of Goods sold and adding other income received within the Period under review

In the case of Winter Gear Inc. related expense charged against sales in arriving at the Business EBT includes Expenses and Bad debt expense.

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