Exercise 19-16 During 2017, Sweet Co.\'s first year of operations, the company r

Question

Exercise 19-16 During 2017, Sweet Co.'s first year of operations, the company reports pretax financial income at $264,400. Sweet's enacted tax rate is 45% for 2017 and 40% for all later years. Sweet expects to have taxable income in each of the next 5 years. The effects on future tax returns of temporary differences existing at December 31, 2017, are summarized as follows Future Years 2018 2019 2020 2021 2022 Total Future taxable (deductible) amounts: Installment sales Depreciation Unearned rent $33,500 $33,500 $33,500 $100,500 5,600 5,600 5,600 $5,600 $5,600 28,000 (49,000) (49,000) (98,000 ) Complete the schedule below to compute deferred taxes at December 31, 2017 Deferred Tax Future Taxable Temporary Difference (Deductible) Amounts Tax Rate (Asset) Liability $100,500 28,000 (98,000) Installment sales Depreciation Unearned rent Totals

Explanation / Answer

1) Calculation of deferred taxes at December 31, 2017 (Amts in $)

2) Taxable Income = Pretax Financial Income - Future Taxable Amounts+Future Deductible Amounts

= $264,400-$100,500-$28,000+$98,000 = $233,900

Income Tax Payable = Taxable Income*Tax Rate

= $233,900*45% = $105,255

Income Tax Expense = Pre Tax Financial Income*Tax Rate

= $264,400*45% = $118,980

3) Journal Entry (Amounts in $)

Temporary Difference Future Taxable (Deductible) Amounts (A) Tax Rate (B) Deferred Tax (Asset) (A*B) Deferred Tax Liability (A*B) Installment Sales 100,500 45% - 45,225 Depreciation 28,000 45% - 12,600 Unearned Rent (98,000) 45% (44,100) Total 30,500 (44,100) 57,825

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