Kline Company, an accrual basis calendar year corporation, reported $560,000 net
ID: 2373497 • Letter: K
Question
Kline Company, an accrual basis calendar year corporation, reported $560,000 net income before tax on its financial statements prepared in accordance with GAAP for 2012. Kline's records reveal the following information: (Kline's MTR is 35%. and all items have been properly reported under GAAP).
. The allowance for bad debts as of January 1, 2012 was $80,000. Write-offs for the year totaled $20,000, and the addition to the allowance for the year was $50,000. The allowance as of December 31 was $110,000.
. Kline paid $75,000 fine to the State of New Jersey for a violation of state pollution control laws.
. Klines lawyers established an estimated fund for a pending lawsuit, which they expect to cost the company $125,000. This liability meets the fixed and determinable standard relating to contingent liabilities under GAAP . Kline actually paid out $120,000 relating to this law suit in 2012.
. Kline received $45,000 in Municipal Bond interest that is not taxable.
Kline had tax depreciation of $89,000 and book depreciation of $94,000
Compute Klines taxable income, and prepare the required journal entry to record the tax expense, tax payable and deferred account, if any.
Explanation / Answer
If I remember my tax laws correctly, it should be the following:
Beginning book income: 560,000
+ Expenses for bad debts according to book 50,000
-Actual write offs during the year 20,000
+Fines (these are not allowed to offset income on your taxes) 75,000
+Contingent entry 125,000 (Depending on the way your problem is worded, I'm assuming this entry was made in 2012. If not, it will not be included in the calculation)
-Actual lawsuit payment 120,000
-Municipal bond interest 45,000
+Book depreciation 94,000
-Tax depreciation 89,000
Taxable income = 630,000
Actual tax = 630000*.35 = $220,500
Tax from book income = 560000*.35 = $196,000
So our journal entry would be:
Income tax expense Dr. 196,000
Deferred tax asset Dr. 24,500
Income tax payable Cr. 220,500
Hope this helps.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.