The accounting records of Shinault Inc. show the following data for 2014 (its fi

Question

The accounting records of Shinault Inc. show the following data for 2014 (its first year of operation )

a) Equipment was acquired in early January for $300,000. Straight-line dep over a 5-year life is used, with no salvage value. For tax purposes, Shinault used a 30% rate to calculate dep.

b)Product warranties were estimated to be $50,000 in 2014. Actual repair and labor costs related to the warranties in 2014 were $10,000. the remainder is estimated to be paid evenly in 2015 and 2016.

c)Gross profit on the accrual basis was $100,00. For tax purposes, $75,000 was recorded on the installment-sale method.

d) Fines incurred for pollution violation were $4,200

e) interest revenue on State of New York bonds totaled $4,000

f) pretax financial income was$750,000 The tax rate is 30%

Calculate taxable income and prepare the journal entry for 2014?

Explanation / Answer

Depreciation as per books = Cost/Useful life = $300,000/5 years = $60,000 per year

Depreciation for tax purposes in 2014 = $300,000*30% = $90,000

Excess depreciation for tax purposes in 2014 = $90,000 - $60,000 = $30,000

Calculation of Taxable Income (Amounts in $)

Deferred tax Asset for 2014 = Temporary Difference of Warranty Expense*30%

= $40,000*30% = $12,000

Deferred Tax Liability for 2014 = Temporary Diff. of Depreciation and Installment sales*30%

= ($30,000+$25,000)*30% = $16,500

Income tax Expense for 2014 = Income Tax Payable+Deferred Tax Liability-Deferred Tax Asset

= $220,560+$16,500-$12,000 = $225,060

Journal Entry (Amounts in $)

Pretax Financial Income 750,000 Permanent Differences: Less: Bonds Interest Revenue (4,000) Add: Pollution Fines 4,200 Temporary Differences: Less: Excess Depreciation for tax purposes (30,000) Less: Installment Sales ($100,000-$75,000) (25,000) Add: Warranty Expense ($50,000 - $10,000) 40,000 Taxable Income 735,200 Income Tax Payable ($735,200*30%) 220,560

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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