Question

Valuation Account At the end of 2013, its rst year of operations, Beattie Company reported taxable income of $38,000 and pretax nancial income of $34,400. The difference is due to the way the company handles its warranty costs. For tax purposes, Beattie deducts the warranty costs as they are paid. For nancial reporting purposes, Beattie provides for a year-end estimated warranty liability based on future expected costs. Beattie is subject to a 30% tax rate for 2013, and no change in the tax rate has been enacted for future years. Based on veriable evidence, the company decides it should establish a valuation allowance of 60% of its ending deferred tax asset.Required:1. Prepare Beattie’s income tax journal entry at the end of 2013.2. Prepare the lower portion of the Beattie’s 2013 income statement.

Answer 1

The journal entry record current and deferred tax at the end of 2013 is shown as:

Income tax expense: $10968

Deferred tax: $432

Income tax payable: $11400

The lower portion of the Beattie’s 2013 income statement as follows:

Pretax operating income: $34,400

Less (income tax expenses): $10968

Net income: $23432

Step-by-step explanation:

The taxable income of BC is $38000 and before tax financial income is $34,400. The income tax is 30%

The income tax payable is calculated as:

Taxable income × tax rate

$38000 × 30%

= $11,400.

Expense of income tax:

Pretax financial income × tax rate

=$34, 400× 30%

=$10, 320

Warranty Liability is calculated as follows:

Taxable income- Pretax financial income

=$38, 000 - $34,400

=$3600

Deferred Tax Asset is calculated as:

Warranty liability × Tax rate

=$3600 × 30%

=$1080

Company establishes valuation allowance of 60% of is ending Deferred Tax asset.

Valuation allowance=$1080 ×60%

=$648

Net Deferred Tax asset= Deferred Tax asset - Valuation allowance

= $1080- $648

= $432

Income tax expense after reducing DTA to realizable value can be calculated below:

Net Income Tax Expense = $10320 + 648

= $10968

Therefore,

The journal entry record current and deferred tax at the end of 2013 is shown as:

Income tax expense: $10968

Deferred tax: $432

Income tax payable: $11400

The lower portion of the Beattie’s 2013 income statement as follows:

Pretax operating income: $34,400

Less (income tax expenses): $10968

Net income: $23432