During 2017, Kingbird Co.’s first year of operations, the company reports pretax

Question

During 2017, Kingbird Co.’s first year of operations, the company reports pretax financial income at $264,100. Kingbird’s enacted tax rate is 45% for 2017 and 40% for all later years. Kingbird 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.

Complete the schedule below to compute deferred taxes at December 31, 2017.

Compute taxable income for 2017.

Prepare the journal entry to record income taxes payable, deferred taxes, and income tax expense for 2017.

Future Years 2018 2019 2020 2021 2022 Total Future taxable (deductible) amounts: Installment sales Depreciation Unearned rent $29,300 $29,300 $29,300 $87,900 5,600 5,600 5,600$5,600 $5,600 28,000 (47,800) (47,800) (95,600)

Explanation / Answer

Note: Deferred tax assets and liabilities are always calculated based on future tax rates

Taxable Income for 2017:

Note: Instalment sales and depreciation are deducted as they are future taxable income, unearned rent is added as it is a future deductible item

Income tax expense = 264,100 *45%= 118,845

Income tax payable = 243,800*45% = 109,710

However, since the tax rate has changed, the difference between the income tax expense and liability will not be completely zeroed out in the coming years. There is a difference of $1,015 due to the tax rate change(explained below), this will have to be adjusted through income tax expense.

So, the journal entry will be:

Note: Income tax expense = 118,845 - 1,015 = 117,830

Temporary difference Future taxable / (Deductible) Amounts Tax rate Asset Liability Installment Sales 87900 40% 35160 Depreciation 28000 40% 11200 Unearned rent -95600 40% 38240 Total 20300 38240 46360

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