Question

The Green Bay Packers began operations at the beginning of 2013. The following information pertains to this company.

Pretax financial income for 2013 is $100,000

The tax rate enacted for 2013 and future years is 40%

Differences between the 2013 income statement and tax return are listed below:

(a) Warranty expense accrued for financial reporting purposes amounts to $7,000. Warranty deductions per the tax return amount to $2,000.

(b) Gross profit on construction contracts using the percentage-of-completion method per financial reporting is $92,000. Gross profit on construction contracts for tax purposes is $67,000.

(c) Depreciation on P,P,&E for book purposes is $60,000 but $80,000 for taxes.

(d) A $3,500 fine paid for violation of pollution laws was deducted in computing pretax financial income.

(e) Interest revenue earned on an investment in tax-exempt municipal bonds amounts to $1,500.

The Green Bay Packers are expected to be profitable in the future.

Compute taxable income for 2013 and the journal entry to record taxes for 2013.

Answer 1

Solution:

Green Bay Packers
Computation of taxable income for 2013
Particulars	Amount
Pretax financial Income	$100,000.00
Permanent differences:
Interest revenue on municipal bonds	-$1,500.00
Pollution Fines	$3,500.00
Temorary differences:
Depreciation Expense ($60,000 - $80,000)	-$20,000.00
Add: Warranty Expense ($7,000 - $2,000)	$5,000.00
Less: Gross profit on construction contracts ($67,000 - $92,000)	-$25,000.00
Taxable Income	$62,000.00
Income tax (40%)	$24,800.00

Green Bay Packers
Journal Entries
Date	Particulars	Debit	Credit
31-Dec-13	Income tax expense Dr	$40,800.00
	Deferred Tax Assets Dr ($5,000*40%)	$2,000.00
	To Income Tax Payable		$24,800.00
	To Deferred tax liability ($45,000*40%)		$18,000.00
	(Being current income tax and deferred taxes)