Exercise 16-15 Multiple tax rates [LO16-2, 16-5] Allmond Corporation, organized

Question

Exercise 16-15 Multiple tax rates [LO16-2, 16-5]

Allmond Corporation, organized on January 3, 2018, had pretax accounting income of $25 million and taxable income of $33 million for the year ended December 31, 2018. The 2018 tax rate is 40%. The only difference between accounting income and taxable income is estimated product warranty costs. Expected payments and scheduled tax rates (based on recent tax legislation) are as follows:

Required:
1. Determine the amounts necessary to record Allmond’s income taxes for 2018 and prepare the appropriate journal entry.
2. What is Allmond’s 2018 net income?

2019 $ 2 million 35 % 2020 2 million 35 % 2021 1 million 35 % 2022 3 million 25 %

Explanation / Answer

Tax = $33Million*40% = $13.2 Million

Net Income = Accounting Income - Tax = $25 Million - $13.2 Million = $11.8 Million (as per Accounting Records)

Journal Entries:-

1.) Statement of P/L A/c Dr. $13.2 Million

            To Provision for Tax               $13.2 Million

2.) Deferred Tax Assets A/c Dr. $3.2 Million [(33-25)*40%]

             To Statement of P/L A/c        $ 3.2 Million

Note:- In Coming Years there is Sufficient Future Taxable Income against which such Deferred Tax Assets can be realised.

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