P19-2 (L01,2) (One Temporary Difference, Tracked for 4 Years, One Permanent Diff
ID: 341083 • Letter: P
Question
P19-2 (L01,2) (One Temporary Difference, Tracked for 4 Years, One Permanent Difference, Change in Rate) The pretax financial income of Truttman Company differs from its taxable income throughout each of 4 years as follows. Pretax Financial Income $290,000 320,000 350,000 420,000 Taxable Income ear 2017 2018 2019 2020 $180,000 225,000 260,000 560,000 Tax Rate 35% 40 40 40 Pretax financial income for each year includes a nondeductible expense of $30,000 (never deductible for tax purposes). The re- mainder of the difference between pretax financial income and taxable income in each period is due to one depreciation tempo- rary difference. No deferred income taxes existed at the beginning of 2017. Instructions (a) Prepare journal entries to record income taxes in all 4 years. Assume that the change in the tax rate to 40% was not enacted until the beginning of 2018. (b) Prepare the income statement for 2018, beginning with Income before income taxes.Explanation / Answer
Year
Pretax financial income
Taxable income
Tax rate
2017
290000
180000
35%
140000
2018
320000
225000
40%
125000
2019
350000
260000
40%
120000
2020
420000
560000
40%
-110000
a.
Year
General Journal
Debit
Credit
2017
Income tax expense
112000
Deferred tax liability
49000
Income tax payable
63000
2018
Income Tax Expense
70000
Deferred Tax Liability
70000
(to record increase tax rate)
Income Tax Expense
140000
Deferred Tax Liability
50000
Income Tax Payable
90000
2019
Income Tax Expense
152000
Deferred Tax Liability
48000
Income Tax Payable
104000
2020
Income Tax Expense
180000
Deferred Tax Liability
44000
Income Tax Payable
224000
b.
Income before Income taxes
320000
Income Tax Expense
Current
90000
Deferred*
57000
147000
Net Income
173000
*Includes adjustment due to tax rate increase
Year
Pretax financial income
Taxable income
Tax rate
2017
290000
180000
35%
140000
2018
320000
225000
40%
125000
2019
350000
260000
40%
120000
2020
420000
560000
40%
-110000
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