please help me with this issue that aris gain whe s a 2. The following informati
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please help me with this
issue that aris gain whe s a 2. The following information is available for the first four years of operations for Bancroft Company 1. Year 2018 2019 Earning Before Tax $800,000 730,000 2. On January 2, 2018, heavy equipment costing $600,000 was purchased. The equipment had a life of 5 years and no salvage value. The straight-line method of depreciation is used for book purposes and the tax depreciation taken each year is listed below Tax Depreciat 2018 2019 20202021 2022 $198,000 $270,000 $90,000 3. The company sells its merchandise on an installment contract basis. in 201 $42,000 SO $600,000 elected, for ta are collected. gross profit ($800,000) in 2018. These procedures created a $600,000 difference between x purposes, to report the gross profit from the sales in the year the receivables However, for financial statement purposes, the company recognized all the nd taxable incomes. The future collections of the installment contracts receivables are expected to result in taxable amounts of $200,000 in each of the next three years. In 2018 Bancroft Company recorded a $70,000 accrual for litigation liability which will be paid in 2019. 5, The enacted tax rates are 40% for 2018, 34% thereafter. instructions (a) Prepare a schedule comparing depreciation for financial reporting and tax purposes for all years. (bi Prepare a reconciliation of Book Income to Taxable Income for 2018. (c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2018. (d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2018. (e) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2018. (f) Show how the deferred income taxes should be reported on the Balance Sheet at December 31, 2018. (g) Show how the deferred income taxes should be reported on the Income Statement at December 31, 2018 (h) Repeat (b) to (g) above for 2019.Explanation / Answer
Year Depreciation for financial reporting Depreciation for tax purpose Difference Tax rate Deferred tax 2018 $120,000 198,000 ($78,000) 40% ($31,200) 2019 $120,000 270,000 ($150,000) 34% ($51,000) 2020 $120,000 90,000 $30,000 34% $10,200 2021 $120,000 42,000 $78,000 34% $26,520 2022 $120,000 - $120,000 34% $40,800 b Reconciliation of Pretax book income to taxable income Pretax book income for 2018 $800,000 Less: Depreciation $78,000 Less: Installment receivables $600,000 Add: Litigation liability $70,000 Taxable Income $192,000 c Schedule of future taxable and deductible amounts Future taxable Depreciation $78,000 Installment receivables $600,000 Deductible amount Legal expenses (litigation liability) $70,000 d Schedule of deferred tax asset and liability Deferred tax asset Litigation liability (70000 x 40%) $28,000 Deferred tax liability Depreciation (78000 x 40%) $31,200 Installment receivables (600000 x 40%) $240,000 e Journal entry to record income tax expenses, deferred taxes and income tax payable Income tax expenses $320,000 Deferred tax asset $28,000 Deferred tax liability $271,200 Income tax payable $76,800 Income tax expenses = Accounting incomex40% =800000x 40% = $320000 Income tax payable = Taxable income x 40% =192000 x 40% = $76800 f Deferred income taxes on the balance sheet at December 31, 2018 Current Assets Deferred tax asset $28,000 Non-current liabilities Deferred tax liability $271,200 g Deferred income taxes are balance sheet accounts and are not reported on the income statement h 2019 Reconciliation of Pretax book income to taxable income Pretax book income for 2019 $730,000 $248,200 Less: Depreciation $150,000 Less: Litigation liability $70,000 Add: Installment received $200,000 Taxable Income $710,000 Schedule of future taxable and deductible amounts Future taxable Depreciation $150,000 Installment receivables $400,000 Schedule of deferred tax asset and liability Deferred tax liability Adjustment for rate change 230,520 Depreciation (150000 x 34%) $51,000 Installment receivables (400000 x 34%) $136,000 Total 417,520 Deferred tax liability reversed $68,000 Net Deferred Tax liability $349,520 Journal entry to record income tax expenses, deferred taxes and income tax payable Income tax expenses $247,520 Deferred tax asset $4,200 Deferred tax liability $40,680 Deferred tax liability $51,000 Income tax payable $241,400
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