Molnar Corporation reported the following results for Year 1, its first year in
ID: 2470155 • Letter: M
Question
Molnar Corporation reported the following results for Year 1, its first year in business:
Taxable income (all taxable at 34%) . . . . . . . . . . . . . . $300,000
Accounting income (income before taxes). . . . . . . . . . $400,000
The difference between taxable income and accounting income resulted from the following:
REQUIRED:
1. Reconcile income before taxes to taxable income.
2. Prepare the journal entry to record the taxes for Year 1 assuming the following turnaround on temporary differences and a 34% tax rate for years 2-3 and 40% for years 4-5:
3. Classify the deferred taxes for balance sheet purposes assuming installment sale receivables are classified as a current asset and product warranty is a long-term liability.
Income Statement Income Tax Return Depreciation $100,000 $150,000 Profit on installment sales 135,000 55,000 Product warranty expense 30,000 -0-Explanation / Answer
Molnar Corporation 1 Details Amt $ Accounting income 400,000 Less: Income on installment sales recognized on receipt basiss (80,000) Less : Additional depreciation in Tax basis (50,000) Add:Product warranty expense non deductible in Taxable income unless paid 30,000 Taxable Income 300,000 2 As per UGAAP the enacted rate is considered for Deferred tax , so 34% is being considered thorughout Journal Entry Account Title Dr $ Cr $ Income Tax Expense 136,000 Income Tax Payable 102,000 Deferred Tax Liability 44,200 Deferred Tax Asset 10,200 3 Deferred Tax classification Temp Difference Current Non Cuurent Deferred Tax Liability-Depreciation= 5,100 11,900 Deferred Tax liability - Installment sale 27,200 Deferred Tax Asset -Warranty Expense 10,200
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