Denver Co. at the end of 20x1, its first year of operations, prepared reconcilia

Question

Denver Co. at the end of 20x1, its first year of operations, prepared reconciliation between pretax financial income and taxable income as follows:

Pretax financial income $300,000

Extra depreciation taken for tax purposes 900,000

Estimated litigation expenses deductible for taxes when paid 1,500,000

Rent collected on the tax return is greater than rent reported on the income statement by $220,000

Interest income from Denver municipal bonds 100,000

Use of the depreciable assets will result in taxable amounts of $300,000 in each of the next three years. The estimated litigation expenses of $1,500,000 will be deductible in 20x4 when settlement is expected.

a) Compute the taxable income.

b) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 20x1, assuming a tax rate of 40% for all years.

Explanation / Answer

Denver Co Details Financial   Tax purpose Temp Diff amount Taxable/ Deductible Deferred Tax Asset Deferred Tax Liability Taxable income           300,000          300,000 Adjustments Extra Tax depreciation        (900,000)       900,000 Taxable          360,000 Litigation Expense      1,500,000 1,500,000 Deductible     600,000 Rent            220,000       220,000 Deductible       88,000 Municipal Bond Interest          (100,000) Permanent difference Total           300,000      1,020,000 Tax Payable           408,000 Tax Expense           120,000 Tax due to permanent difference=             40,000 Journal Entry Account title Dr$ Cr $ Income Tax Expense           120,000 Income Tax Payable          408,000 Defreed Tax Asset           688,000 Deferred Tax Liability          360,000 Provision for Income Tax Expense            40,000

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.