The following facts relate to Pharoah Corporation. a) Compute the amount of pret

Question

The following facts relate to Pharoah Corporation.

a) Compute the amount of pretax financial income for 2017.

b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

c) Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income taxes.” (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

d) Compute the effective tax rate for 2017. (Round answer to 0 decimal places, e.g. 25%)

1. Deferred tax liability, January 1, 2017, $71,400. 2. Deferred tax asset, January 1, 2017, $23,800. 3. Taxable income for 2017, $124,950. 4. Cumulative temporary difference at December 31, 2017, giving rise to future taxable amounts, $273,700. 5. Cumulative temporary difference at December 31, 2017, giving rise to future deductible amounts, $113,050. 6. Tax rate for all years, 40%. No permanent differences exist. 7. The company is expected to operate profitably in the future.

Explanation / Answer

Part A

To complete a reconciliation of pretax financial income and taxable income, solving for the amount of pretax financial income, we must first determine the amount of temporary differences arising or reversing during the year. To accomplish that, we must determine the amount of cumulative temporary differences underlying the beginning balances of the deferred tax liability of $71,400 and the deferred tax asset of $23,800.

$71400 ÷ 40% = $187,000 beginning cumulative temporary difference. $23,800 ÷ 40% = $ 59500 beginning cumulative temporary difference.

Cumulative temporary difference at 12/31/2017 which will result in future taxable amounts.............................. $273,700 Cumulative temporary difference at 1/1/2017 which will result in future taxable amounts.......................................... 178500

Originating difference in 2017 which will result in future taxable amounts........................................................ $ 95200

Cumulative temporary difference at 12/31/2017 which will result in future deductible amounts......................... $ 113,050

Cumulative temporary difference at 1/1/2017 which will result in future deductible amounts................................ .... 59,500

Originating difference in 2008 which will result in future deductible amounts................................................. $ 53,550

Pretax financial income............................................. $ X

Originating difference which will result in future taxable amounts..................................................................... (95200)

Originating difference which will result in futur deductible amounts....................................................................... 53,550

Taxable income for 2017 .......................................... $124,950

Solving for pretax financial income:

X – $86700 + $53550 = $124950

X = $166600= Pretax financial income

Therefore,

Pretax financial income = $166,600

Part B

Deferred tax liability at the end of 2017(273700*40%).$109480

Deferred tax liability at the beginning of 2008....... ....... 71,400

Deferred tax expense for 2008 (net increase required in deferred tax liability)...................................................... $38080

Deferred tax asset at the end of 2017(113050*40%).$ (45220)

Deferred tax asset at the beginning of 2017................. 23800 Deferred tax benefit for 2017 (net increase required in deferred tax asset)................................................................. $(21420)

Deferred tax expense for 2017................................. $ 38080

Deferred tax benefit for 2017...................................... (21420) Net deferred tax expense (benefit) for 2017.................16660

Current tax expense for 2017?(Income tax payable) ... 49980 Income tax expense for 2017..................................... $ 66640

Part C

Pharoah Corporation

Income statement (partial)

For the Year Ended December 31 2017

Part D

effective tax rate for 2017 = 40%

Because of the same tax rate for all years involved and no permanent differences, the effective rate should equal the statutory rate. The following calculation proves that it does: $66640 ÷ $166600 = 40% effective tax rate for 2017

Account titles and explanation debit credit Income Tax Expense 66640 Deferred tax asset 21420 Income tax payable (124950*40%) 49980 Deferred tax liability 38080

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