Question

1. Wise Co. at the end of 2017, its first year of operations, prepared a reconciliation between pretax financial income and taxable Income as follows:

Pretax financial income $ 805,000

Estimated warranty expenses deductible for taxes when paid 322,000

Extra depreciation   (324,000)

Taxable income $ 803,000

Estimated warranty expense of $72,000 will be deductible in 2018, $100,000 in 2019, and $150,000 in 2020. The use of the depreciable assets will result in taxable amounts of $108,000 in each of the next three years.

a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming an income tax rate of 40% for all years.

Answer 1

(a)Schedule of future taxable and deductible amounts

	2018	2019	2020	Total
Future taxable (deductible) amounts:
Extra depreciation	$108,000	$108,000	$108,000	$324,000
Litigation	($72,000)	($100,000)	($150,000)	($322,000)

Journal Entry

Income Tax Expense ($321,200+$129,600-$128,800) Deferred Tax Asset ($322,000 × 40%) Deferred Tax Liability($324,000 × 40%) Income Taxes Payable ($803,000 × 40%)

322,000 128,800 - -

- - 129,600 321,200