Deferred income taxes. Pole Co. at the end of 2013, its first year of operations

Question

Deferred income taxes.
Pole Co. at the end of 2013, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:

Pretax financial income $ 420,000
Extra depreciation taken for tax purposes (1,050,000)
Estimated expenses deductible for taxes when paid 940,000
Taxable income $ 310,000

Use of the depreciable assets will result in taxable amounts of $350,000 in each of the next three years. The estimated litigation expenses of $940,000 will be deductible in 2016 when settlement is expected.
Instructions
(a) Prepare a schedule of future taxable and deductible amounts.
(b) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2013, assuming a tax rate of 40% for all years.

Explanation / Answer

a. 2011 2012 2013 Extra depreciation $350,000 $350,000 $350,000 Less: Litigation expenses 0 0 $840,000 Taxble income $350,000 $350,000 0 b. Tax payable 210000 * 40% $84,000 Differed tax amount : Tax on Expenses (840000 * 40%) $336,000 Differed tax liability: Tax on extra depreciation (1050000 * 40%) $420,000 Income tax expenses: = 84000 + 420000 - 336000 $168,000 Entries: Entry for tax payable: Income tax espense Tax payable At the time of payment: Income Tax payable Bank /Cash Income tax expense payment: Income tax expense Bank / Cash Differed tax Liability: Income tax expense Income tax payable Deferred tax liability Thank you....

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