1. Amazing Accountants (AA) opened business on January 1, 20X2. 2. It uses strai
ID: 2456163 • Letter: 1
Question
1. Amazing Accountants (AA) opened business on January 1, 20X2. 2. It uses straight line depreciation for financial reporting purposes. 3. No accounts were written off during 20X2. 4. AA also took out a $1,000,000 life insurance policy on its owner/partner for a yearly premium of $1,200, whereby the company is the beneficiary of the policy. 5. The following data applies to AA at year end and December 21, 20X2. Current Assets & Current Liabilities: Accounts Receivable: $20,000 Allow. For Doubt Accts: (1,000) Unearned Rev. (Retainers): 4,500 Property, Plant, Equip: Office Equipment Cost: $200,000 Accum Deprec. (Straight line) 20,000 Accum Deprec. (MACRS) 28,580 Other: Income Before Tax Per books at 12/31/X2: $250,000 Income Tax Rate: 30% 1.) Record the 12/31/X2 income tax journal entry.1. Complete the tax schedule leading up to the JEs. NOTE: Even if your journal entry is correct, you will NOT get full credit without the calculations. Use a separate sheet; all will not fit here. 2.) What is an example of a temporary tax difference and give an example? 3.) What is an example of a non-temporary tax difference and give an example?
Explanation / Answer
Two types of temporary differences exist. One results in a future taxable amount, such as revenue earned for financial accounting purposes but deferred for tax accounting purposes. This may happen if a company uses the cash method for tax preparation.
The second type of temporary difference is a future deductible amount. The company is reporting an expense on the current tax return but reports it for financial statement purposes in the future. Depreciation is a great example of this.
Non-temporary tax difference:
Permanent differences can arise when expenses recognized on the financial statements will never be deductible on the income tax returns. For example, tax penalties on underpaid taxes and fines resulting from a violation of the law are recognized as expenses on the financial statements but are not deductible expenses on the tax return. With certain start-up costs, such as the cost of raising capital for a new business, the CPS enters them as expenses on the financial statements but he cannot deduct them on the tax return. Business entertainment and meal expenses are fully deductible on the financial statements, but the CPA can use only 50 percent of these expenses as allowable deductions on the tax return.
Income Before Tax Per books at 12/31/X2 250,000 Add: Depreciation as per books 20,000 Deprepreciation as per MACRS (28,580) 241,420 Income tax at 30% 72,426 Accounts Debit Credit Income tax expense 72,426 Income tax payable 72,426Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.