Concept explainers
1.
Determine the taxable income of Company P for 2016.
1.
Explanation of Solution
Temporary Difference: Temporary difference refers to the difference of one income recognized by the tax rules and accounting rules of a company in different periods. Consequently the difference between the amount of assets and liabilities reported in the financial reports and the amount of assets and liabilities as per the company’s tax records is known as temporary difference.
Determine the taxable income of Company P for 2016:
Computation of taxable income | |
Particulars | Amount |
Pre-tax financial income | $66,000 |
Add: Excess of | $8,000 |
Excess of warranty expense in financial reporting over tax income (2) | $7,000 |
Non-deductible officer's insurance premium for tax purpose | $15,000 |
$96,000 | |
Less: Non-taxable interest of Municipal bonds | ($25,000) |
Excess of depletion percentage over cost depletion | ($10,000) |
Excess of gross profit recognized for financial reporting over tax purpose (3) | ($11,000) |
Taxable Income | $50,000 |
Table (1)
Thus, the taxable income of Company P is $50,000.
Working Note 1: Determine the Excess of depreciation in financial reporting over tax income:
Working Note 2: Determine the Excess of depreciation in financial reporting over tax income:
Working Note 3: Determine the Excess gross profit recognized for financial reporting over tax purpose:
2.
Record the income tax entry for Company P.
2.
Explanation of Solution
Income Tax Expenses: The expenses which are related to the taxable income of the individuals and business entities for an accounting period, and are recognized by them for the purpose of federal government and state government tax are called as income tax expenses.
Record the income tax entry for Company P.
Date | Accounts title and explanation | Post Ref. | Debit ($) | Credit ($) |
2016 | ||||
December 31 | Income Tax Expense (Balancing figure) | 13,800 | ||
2,100 | ||||
2,400 | ||||
Income Tax Payable (6) | 15,000 | |||
Deferred Tax Liability-Accrual basis sales (7) | 3,300 | |||
(To record income tax expense with deferred tax asset and deferred tax liability) |
Table (2)
- Income Tax Expense is a component of
stockholders’ equity and decreases, so debit it for $13,800. - Deferred Tax Asset is an asset and increased, so debit it for $2,100.
- Deferred Tax Liability is a liability and decreases, so debit it for $2,400.
- Income Tax Payable is a liability and increases, so credit it for $15,000.
- Deferred Tax Liability is a liability and increases, so credit it for $3,300.
Working note 4: Determine the deferred tax asset – warranty expense:
Working note 5: Determine the deferred tax liability – depreciation expense:
Thus, there is a decrease of ($2,400) in deferred tax liability.
Working note 6: Compute the income tax payable:
Working note 7: Determine the deferred tax liability – accrual sales basis:
3.
Determine the permanent differences in Items 1 through 8 and elaborate the reasons for accounting the
3.
Explanation of Solution
The permanent differences in items 1 through 8 are as follows:
- Officer’s life insurance premium expense.
- Non-taxable interest revenue form municipal bonds.
- Percentage of depletion in excess of cost exhaustion.
These items are considered as permanent difference and would never be reversed in future (since the pre-tax financial income and taxable income are always different) and hence are not considered as deferred tax items for which the
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Chapter 18 Solutions
Intermediate Accounting: Reporting and Analysis
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