Question

1. The following information is available for the first three years of operations for Santos Inc.:

1. Year              Taxable Income

      2020                         $850,000

      2021                           900,000

2. Depreciation of property, plant and equipment for financial reporting purposes amounts to $30,000 each year for 3 years beginning in 2020. The company is able to deduct the full cost under the IRS Code Section 179 $90,000 amount allowed for tax purposes in 2020 (note there is no tax depreciation in future years).
3. On July 1, 2020, $280,000 was collected in advance for rental of a building for a two-year period July 1, 2020 – June 30, 2022. The entire $280,000 was reported as taxable income in 2020. The company uses the accrual basis of accounting for financial statement purposes.
4. In 2021 Santos Company recorded a $40,000 accrual for litigation liability which will be paid in 2022.
5. The company sells its merchandise on an installment contract basis. In 2020, Santos Inc. reported gross profit of $220,000 tax purposes, and $520,000 for financial statement purposes. This will result in taxable amounts of $150,000 in each of the next two years.
6. Warranty expense accrued for financial reporting was $12,000 in 2020. Warranty deductions on the tax returns were $7,000 in 2020 and $5,000 in 2021.
7. Santos Inc. paid a $2,000 fine in 2021 for violating pollution laws.
8. The enacted tax rates existing at December 31, 2020 are 20% for 2020 and 25% for 2021 and thereafter.      

Instructions

1. Complete the worksheet provided. It includes the following.
   1. A reconciliation of Book Income to Taxable Income for 2020.
   2. A schedule of future taxable and (deductible) amounts at the end of 2020.
   3. A schedule of the deferred tax (asset) and liability at the end of 2020.
   4. The journal entry to record income tax expense, deferred income taxes, and income tax payable for 2020.
2. Show how the deferred income taxes should be reported on the Balance Sheet at December 31, 2020.
3. Show how the taxes should be reported on the Income Statement at December 31, 2020.
4. Repeat a. to f. above for 2021.

****Please show calculations or how you got the figures.

I will upload worksheet in a comment

Answer 1

Answer a and b (1)

Year	2020	2021
Taxable Income	850000	900000
Add: Tax depreciation	90000
Less: FR depreciation	30000	30000
Less: Rental income belonging to future years	280000/24*18 = 210000
Add: Rental income for 2021		280000/24*12 = 140000
Add: Liability should be recognised in the period in which it is accrued, since company is following accrual system.
Less: contract profit for tax purposes	220000	150000
Add: contract profit for FR purposes	520000
Add: warranty deductions for tax purposes	7000	5000
Less: warranty deductions for FR purposes	12000
Less: Fine paid (Since no deduction for tax purposes would be allowed for fine payment)		2000
Book income	995000	863000

Answer a and b (2) & (3)

Deferred Tax Assets/ Liabilities calculation for 2020
Particulars	Temporary difference	Rate of tax	Classify Deductible Temporrary Difference/Taxable Temporrary Difference	DTA/ DTL	Amount
Depreciation	60000	20%	Taxable Temporrary Difference	DTL	12000
Rental Income	210000	20%	Deductible Temporrary Difference	DTA	42000
Contract Profit	300000	20%	Taxable Temporrary Difference	DTL	60000
Warranty deductions	5000	20%	Deductible Temporrary Difference	DTA	1000
				DTL	29000
Deferred Tax Assets/ Liabilities calculation for 2021
Particulars	Temporary difference	Rate of tax	Classify Deductible Temporrary Difference/Taxable Temporrary Difference	DTA/ DTL	Amount
Depreciation	30000	25%	Deductible Temporrary Difference	DTA	7500
Rental Income	140000	25%	Taxable Temporrary Difference	DTL	35000
Contract Profit	150000	25%	Taxable Temporrary Difference	DTA	37500
Warranty deductions	5000	25%	Deductible Temporrary Difference	DTL	1250
Fine (Since no deduction for tax purposes would be allowed for fine payment)	0	25%			0
				DTA	8750

Answer a & b (3)

Journal Entry for 2020
Tax payable account Dr.	170000
To Bank		170000
(recording the amount payable)
Profit and loss a\c Dr.	29000
To deferred tax liability		29000
Journal Entry for 2021
Tax payable account Dr.	225000
To Bank		225000
(recording the amount payable)
Deferred tax a\c Dr.	37750
To Profit and loss a\c		37750