Question

The records for Botox Company show this data for 2010 and 2011:

- For 2010, Botox recorded a probable and estimable contingent liability due to a lawsuit. The range for the loss is $700,000 to $1,000,000. In 2011, the lawsuit is settled and Botox pays the actual loss of $850,000.

- Gross profit on a two-year construction contract begun in 2010 was recorded at $350,000 for 2010 and $600,000 for 2011. Cash received was $50,000 in 2010 and $500,000 in 2011.

- An officer of Botox Company passed away during 2011. Life insurance proceeds from a key officer life insurance policy was $200,000.

- Botox earns $600 per month on a municipal bond investment throughout 2010 and 2011.

- Machinery was acquired in January 2010 for $300,000. Straight-line depreciation over a five-year life (no salvage value) is used. For tax purposes, Tuesday may deduct 30% of the cost in 2010 and 25% of the cost in 2011, with the remainder of the cost being depreciated at 15% per year for the three years 2012-2014.

- Pretax financial income is $1,350,000 in 2010 and $1,500,000 in 2011. The tax rate is 25% for all years.

- Botox Company has no beginning balances of deferred tax assets or liabilities.

(a) Prepare a schedule for 2010 and 2011 starting with pretax financial income and compute taxable income.

(b) Prepare the journal entry to record income taxes for 2011.

Answer 1

Ans(a)
	Schedule for calculation of taxable income		In $
		2010	2011
	Pretax financial income	1350000	1500000
	Loss from law suits		-850000
	Proceeds from key officer LIC		-200000
	Depreciation as per accounting records	60000	60000
	Depreciation for tax purposes	-90000	-75000
	Taxable income	1320000	435000
	Tax on taxable income	330000	108750
	Tax on financial income	337500	375000
	Current Tax	337500	375000
	Deferred Tax	-7500	-266250
	Tax paybles	330000	108750
Note	1. Law suits losses are not allowed as deduction under income tax laws (it may be defer from country to country)
	2. LIC proceeds are not considered as business income (it may be defer from country to country)
	3. Depreciation is an temporary time in difference hence it would be adjusted for calculation of deferred tas assets/ liabilities
Note	Calculation of deferred tax assets/ liabilities
		2010	2011
	Depeciation as temporatry time in difference	-30000	-15000
	Tax rate	25%	25%
	Opening balance of deferred tax liability	0	-7500
	Deferred tax liability for current year to profit and loss account	-7500	-3750
	Closing balance of deferred tax liability	-7500	-11250
Ans(b)	Journal enteries
	2010
	Profit and loss account	330000
	Provision for Deferred tax	7500
	To Provision for current tax		337500
	(being provision made for income tax during the year)
	2011
	Profit and loss account	108750
	Provision for Deferred tax	266250
	To Provision for current tax		375000