Question

The accounting records of Perkins Inc. show the following data for 2019. Pretax financial income was $640,000. Life insurance expense on officers was $16,000. Equipment was acquired in early January for $450,000, straight-line depreciation over 5 year life is used, with no salvage value. For tax purposes, Perkins Inc. used a 40% rate to calculate depreciation. Product warranties were estimated to be $75,000 in 2018. Actual repair and labor costs related to the warranties in 2019 were $15,000 and the remainder is estimated to be paid evenly in 2029 and 2021. Sales on an accrual basis were $160,000. For tax purposes, $90,000 was recorded on the installment sales method. Fines incurred for pollution violations were $3,600. The tax rate is 30%.

Required: Prepare the journal entries related to Deferred Tax in 2019.

Answer 1

Solution:

Calculation of Deferred Tax Asset
Particulars	Amount
Depreciation As per Books	$    90,000.00
Depreciation As per tax	$ 1,80,000.00
Difference	$    90,000.00
DTL on Depreciation = $ 90,000 *30%	$    27,000.00
DTL on Installment Sales = ($1,60,000 - $90,000)*30%	$    21,000.00
Total DTL = $27,000+$21,000	$    48,000.00
DTA on Warranty Costs = ($75,000 -$15,000)*30%	$    18,000.00

Calculation of Payable Income Tax
Particulars	Amount
Pretax Accounting Income	$ 6,40,000.00
Permanent Differences
Add: Insurance Expenses	$    16,000.00
Add: Pollution Fines	$       3,600.00
Pretax Accounting Income after Adjusting Permanent Diffrences	$ 6,59,600.00
Temporary Differences
Less: Depreciation Expense	$    90,000.00
Less: Installment Sales ( $160000 - $ 90,000)	$    70,000.00
Add:Warranty Costs allowed in Coming Years ($ 75,000 - $15,000)	$    60,000.00
Taxable Income ( $ 6,59,600 - $ 90,000 - $ 70,000 + $60,000)	$ 5,59,600.00
Tax Payable ($ 5,59,600 * 30%)	$ 1,67,880.00

	Journal Entry to Record Income Taxes and Deferred Taxes in 2019
Date	Particulars	Amount	Amount
1	Income Tax Expense	$       1,97,880
	Deferred Tax Asset	$          18,000
	TO Deferred Tax Liability		$          48,000
	TO Income Tax Payable		$      1,67,880

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