Question

Intermediate Accounting II

   Teri Inc., in its first year of operations, has the following differences between the book basis and tax basis of its assets and liabilities at the end of 20x0.

Book Basis                   Tax Basis

Equipment (net)                        $400,000                      $340,000

Estimated warranty liability      $200,000                      $ -0-

It is estimated that the warranty liability will be settled in 20x1. The difference in equipment (net) will result in taxable amounts of $20,000 in 20x1, $30,000 in 20x2, and $10,000 in 20x3. The company has taxable income of $520,000 in 20x0. As of the beginning of 20x0, its enacted tax rate is 34% for 20x0-20x2, and 30% for 20x3. Teri expects to report taxable income through 20x3.

Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 20x0.

Answer 1

Teri Inc.,
Prepare the journal entry to record income tax expense, deferred income taxes, and income
tax payable for 20x0.
For depreciation,
TE>AE >TI<AI > less tax now, more later > DTL = 20,000*.34 + 30,000*.34 + 10,000*.3 = 20,000
For warranty,
TE<AE > TI>AI > more tax now, less tax later > DTA =200,000*.34 = 68,000
DTA a/c                             Dr.				68000
Income Tax Expense a/c          Dr.				128800
To DTL					20000
Income Tax Payable (520,000*.34)					176800