The following information has been obtained for Blue Corporation 1. Prior to 201
ID: 2563901 • Letter: T
Question
The following information has been obtained for Blue Corporation 1. Prior to 2017, taxable income and pretax financial income were identical. 2. Pretax financial income is $1,747,000 in 2017 and $1,434,000 in 2018. 3. On January 1, 2017, equipment costing $1,304,000 is purchased. It is to be depreciated on a straight-line basis over 5 years for tax purposes and over 8 years for financial reporting purposes. (Hint: Use the half-year convention for tax purposes, as discussed in Appendix 11A.) 4. Interest of $54,000 was earned on tax-exempt municipal obligations in 2018. 5. Included in 2018 pretax financial income is a gain on discontinued operations of $195,000, which is fully taxable. 6. The tax rate is 35% for all periods 7. Taxable income is expected in all future years. Compute taxable income and income taxes payable for 2018. Taxable income Income taxes payable $Explanation / Answer
Computation of taxable income Particulars Amount Pretax financial Income 1,434,000 Add:- Depreciation on equipment 163,000 163,000 less:- Depreciation on equipment 260,800 Tax exempt interest 54,000 314,800 Taxable income 1,282,200 Tax payable @ 35% 448,770 Journal entries Particulars Debit Credit Tax expenses 448,770 Provision for tax 448,770 (being income tax has been recognised) Deferred tax expenses 34,230 Deferred tax liabilities 34,230 (being deferred tax has been recognised) Blue Corporation Income Statement Particulars Amount Income from continuing operation before income tax 1,239,000 Gain on discontinued operations 195,000 Net profit before tax 1,434,000 Less:- Tax expenses Current tax 448,770 Deferred tax 34,230 483,000 Net profit after tax 951,000 Blue Corporation Balance sheet Particulars Amount Liabilities Deferred tax liabilities 34,230 Provisions 448,770
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