14. Icecap Co. at the end of 2018, its first year of operations, prepared a reco

Question

14. Icecap Co. at the end of 2018, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income Estimated warranty expenses deductible for taxes when paid Extra depreciation Taxable income $ 950,000 1,200,000 (1.950000) Estimated warranty expense of $800,000 will be deductible in 2019, $300,000 in 2020, and $100,000 in 2021. The use of the depreciable assets will result in taxable amounts of $650,000 in each of the next three years. a) Prepare a table of future taxable and deductible amounts. b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2018 assuming an income tax rate of 40% for all years.

Explanation / Answer

*Income tax expense for the year is calculated @40% on pre tax financial income - 950,000*40%

Icecap Co Current year 2018 Future Taxable Amounts Future deductible Amounts PreTax Financial Income                    950,000 Permanent difference                                -   Temporary differences Estimated warranty expenses - deductible for taxes when paid                1,200,000    (1,200,000) Extra depreciation              (1,950,000)            1,950,000 Taxable Income                    200,000            1,950,000    (1,200,000) Enacted tax rate 40% Tax payable currently                      80,000 Deferred tax liability                    780,000 Deferred tax Asset                  (480,000) Journal Entry Dr Income tax expense                    380,000* Dr Deferred tax Asset                    480,000 Cr Income Tax payable                  80,000 Cr Deferred tax Liability                780,000

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