The accounting records of Tamarisk Inc. show the following data for 2017 (its fi

Question

The accounting records of Tamarisk Inc. show the following data for 2017 (its first year of operations).

A)Prepare a schedule starting with pretax financial income in 2017 and ending with taxable income in 2017.

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

1. Life insurance expense on officers was $8,900. 2. Equipment was acquired in early January for $278,000. Straight-line depreciation over a 5-year life is used, with no salvage value. For tax purposes, Tamarisk used a 30% rate to calculate depreciation. 3. Interest revenue on State of New York bonds totaled $3,800. 4. Product warranties were estimated to be $52,300 in 2017. Actual repair and labor costs related to the warranties in 2017 were $10,400. The remainder is estimated to be paid evenly in 2018 and 2019. 5. Gross profit on an accrual basis was $104,000. For tax purposes, $79,200 was recorded on the installment-sales method. 6. Fines incurred for pollution violations were $4,000. 7. Pretax financial income was $803,200. The tax rate is 30%.

Explanation / Answer

A)Prepare a schedule starting with pretax financial income in 2017 and ending with taxable income in 2017. Schedule of Pretax Financial Income and Taxable Income for 2017 Pretax financial income $803,200 Permanent differences Insurance expense                            $8,900 Bond interest revenue                            -$3,800 Pollution fines                                   $4,000 $812,300 Temporary differences Depreciation expense = Depreciation for books ($278,000/5) - Depreciation tax return ($278,000 X 30%)                            -$27,800 Installment sales ($104,000 – $79,200)                             -$24,800 Warranty expense ($52,300 – $10,400)                                $41,900 Taxable income                             $801,600 Tax Rate 30.00% Income tax payable $240,480 B) Income Tax Expense $243,690 Deferred Tax Asset $12,570                   Deferred Tax Liability $15,780                   Income tax payable $240,480 Deferred Tax Assets = Warranty expense ($52,300 – $10,400) x 30%   $12,570 Deferred Tax Liability Installment sales ($104,000 – $79,200) x 30% -$7,440 Depreciation Expenses = -27800 x 30% -$8,340 Total Deferred Tax Liability -$15,780 Deferred tax expense for 2017 $15,780 Deferred tax benefit for 2017 -$12,570 Net deferred tax expense for 2017 $3,210 Current tax expense for 2017 $240,480 Income tax expense for 2017 $243,690

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