Question

During 2017, Kate Holmes Co.'s first year of operations, the company reports pretax financial income at $250,000. Holmes's enacted tax rate is 45% for 2017 and 40% for all later years. Holmes expects to have taxable income in each of the next 5 years. The effects on future tax returns of temporary differences existing at December 31, 2017, are summarized as follows:

Future Years
2018 2019 2020 2021 2022 Total
Future taxable (deductible) amounts:
Installment sales $32,000 $32,000 $32,000 $ 96,000
Depreciation 6,000 6,000 6,000 6,000 6,000 30,000
Unearned rent (50,000) (50,000) (100,000)
(a) Compute taxable income for 2017.
(c) Prepare the journal entry to record income taxes payable, deferred taxes, and income tax expense for 2017.

Answer 1

a. $224,000

c. Journal Entry

Step-by-step explanation:

a. Taxable income for 2017 = Pretax financial income - Temporary sales - Depreciation + Unearned rent

= $250,000 - $96,000 - $30,000 + $100,000

= $224,000

c. Journal Entry

Income tax expenses Dr, $111,200

($224,000 × 45%) + ($50,400 - $40,000)

Deferred tax assets Dr, $40,000

To income tax payable $100,800

($224,000 × 45%)

To Deferred tax liability $50,400

For computing deferred tax

Temporary differences Future taxable Tax rate (Assets) Liability

Installment sales $96,000 40% $38,400

Depreciation rent $30,000 40% $12,000

Unearned rent ($100,000) 40% ($40,000)

Totals $26,000 ($40,000) ($50,400)