Question

For calendar year 2021, Pharoah Corp. reported depreciation of $1640000 in its income statement. On its 2021 income tax return, Pharoah reported depreciation of $2476000. Pharoah's income statement also included $312000 accrued warranty expense that will be deducted for tax purposes when paid. Pharoah's enacted tax rates are 20% for 2021 and 2022, and 15% for 2023 and 2024. The depreciation difference and warranty expense will reverse over the next three years as follows: Depreciation Difference Warranty Expense 2022 $332000 $64000 2023 292000 104000 2024 212000 144000 $836000 $312000 These were Pharoah's only temporary differences. In Pharoah's 2021 income statement, the deferred portion of its provision for income taxes should be

Answer 1

Pharoah Corp.

In Pharoah's 2021 income statement, the deferred portion of its provision for income taxes should be:

= $104,800.

Step-by-step explanation:

a) Data and Calculations:

Tax rates for 2021 and 2022 = 20%

Tax rates for 2023 and 2024 = 15%

2021 Income Statement Depreciation reported = $1,640,000

2021 Income Tax Depreciation on tax return = $2,476,000

Temporary difference due to depreciation = $836,000 ($2,476,000 - $1,640,000)

Temporary difference due to Accrued Warranty Expense = $312,000

Temporary Differences Reversal:

Depreciation Difference Warranty Expense

2022 $332,000 $64,000

2023 292,000 104,000

2024 212,000 144,000

Total $836,000 $312,000

Deferred Tax Liability (Depreciation Difference) = $167,200 ($836,000 * 20%)

Deferred Tax Asset (Warranty Expense) = $62,400 ($312,000 * 20%)

Deferred portion of provision for income taxes = $104,800 ($167,200 - $62,400)