Question

The One About Income Taxes

Cold Smoke began operations in 2018. The company sometimes sells used warehouses on an installment basis. In those cases, Cold Smoke reports income in its income statement in the year of the sale. In its income tax return, though, Cold Smoke reports installment income by the installment method. Installment income in 2018 was $90,000, which Cold Smoke expects to collect equally over the next three years. The tax rate is 30%, but based on an enacted law, is scheduled to become 35% in 2020.

                 

Cold Smoke's pretax accounting income from the 2018 income statement was $830,000, which includes $40,000 of interest revenue from an investment in municipal bonds. There were no differences between accounting income and taxable income other than those described above.

                    

Required:

(1.)    Prepare the appropriate journal entry to record Cold Smoke's 2018 income taxes. Show calculations.

(2.)    What is Cold Smoke's 2018 net income?

Answer 1

A / 1	B	C	D
2	Computation of Tax
3	Assessee: Cold Smoke	Year: 2018
4	Particulars	$	$
5	Pre Tax income		$        830,000
6	Less: Income from Municipal bonds(non taxable)	$     40,000
7
8	Taxable Income		$        790,000
9	Less: Income Tax@30%	$   237,000
10
11	Net Income after Tax		$        553,000
12
13	1) Journal Entry
14	Statement of Income   Debit	$   237,000
15	Provision for Income Tax		$        237,000
16	(Being income tax provided for the year 2018)
17
18	2) Net income after Tax		$        553,000
19