Question

In: Accounting

The pretax financial income of Sweet Company differs from its taxable income throughout each of 4...

The pretax financial income of Sweet Company differs from its taxable income throughout each of 4 years as follows.

Year

Pretax
Financial Income

Taxable Income

Tax Rate

2020 $277,000 $184,000 35 %
2021 291,000 233,000 20 %
2022 336,000 272,000 20 %
2023 402,000 560,000 20 %


Pretax financial income for each year includes a nondeductible expense of $32,900 (never deductible for tax purposes). The remainder of the difference between pretax financial income and taxable income in each period is due to one depreciation temporary difference. No deferred income taxes existed at the beginning of 2020.

Part 1

Prepare journal entries to record income taxes in all 4 years. Assume that the change in the tax rate to 20% was not enacted until the beginning of 2021. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date

Account Titles and Explanation

Debit

Credit

2020

2021

(To record the adjustment for the decrease in the enacted tax rate.)
(To record income taxes for 2021.)

2022

2023

Solutions

Expert Solution

Answer
Explanation :  
Computation of taxable/Reversible temporary differences and Deferred tax liability
Particulars 2017 $           2,018 $           2,019 2020
Pre tax financial income $     2,77,000 $      2,91,000 $      3,36,000 $      4,02,000
Add: Non deductible expense $        32,900 $         32,900 $         32,900 $         32,900
Less: Taxable income $     1,84,000 $      2,33,000 $      2,72,000 $      5,60,000
Taxable / (Deductible) Temporary differences $     1,25,900 $         90,900 $         96,900 $     -1,25,100
Tax rate 35% $                  0 $                  0 20%
Deferred tax liability $        44,065 $         18,180 $         19,380 $                 -  
Reversal of deferred tax liability $        -25,020
Journal Entry
Date Account titles and explanation Debit Credit
2020 Income tax expense $      1,08,465
           To Income tax payable ($184,000*35%) $         64,400
           To Deferred tax liability $         44,065
(To record income tax and deferred tax for the year)
2021 Income tax expense Dr $         64,780
           To Income tax payable ($233,000*20%) $         46,600
           To Deferred tax liability $         18,180
(To record income tax and deferred tax for the year)
2022 Income tax expense Dr $         73,780
           To Income tax payable ($272,000*20%) $         54,400
           To Deferred tax liability $         19,380
(To record income tax and deferred tax for the year)
2023 Income tax expense Dr $         86,980
Deferred tax liability Dr $         25,020
           To Income tax payable ($560,000*20%) $      1,12,000
(To record income tax and deferred tax for the year)

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