Question

The records for Pharoah Co. show this data for 2021: ● Gross profit on installment sales recorded on the books was $370,000. Gross profit from collections of installment receivables was $230,000. ● Life insurance on officers was $3,300. ● Machinery was acquired in January for $250,000. Straight-line depreciation over a ten-year life (no salvage value) is used. For tax purposes, MACRS depreciation is used and Pharoah may deduct 14% for 2021. ● Interest received on tax exempt Iowa State bonds was $8,500. ● The estimated warranty liability related to 2021 sales was $21,100. Repair costs under warranties during 2021 were $13,100. The remainder will be incurred in 2022. ● Pretax financial income is $550,000. The tax rate is 20%. Prepare a schedule starting with pretax financial income and compute taxable income. Prepare the journal entry to record income taxes for 2021.

Answer 1

(a) Pretax financial income $550000

Permanent differences:

Life insurance $3300

Tax exempt interest ($8500)

Temporary differences:

Installment sales ($370000-$230000)=($140000)

Extra depreciation ($35000-$25000) =($10000)

Warranties $21100-$13100=$8000

Taxable income =$402800

(b) Income tax expenses $108960

Deferred tax asset $1600

Deferred tax liability $30000

Income tax payable $80560

Working:

Income tax expense= 80560+(30000-1600)=108960

Deferred tax asset=20%of 8000=1600

Deferred tax liability=20%*(10000+140000)=30000

Income tax payable=20%*402800=80560