Question

CP 9‐5

Paul’s Roofing Corporation paid monthly corporate income tax

installments of $500 commencing February 15, 2019. The company’s

income before income taxes for the year ended December 31, 2019

was $15,000. The corporate income tax rate is 40%. Paul’s Roofing paid

the 2019 corporate income taxes owing on January 31, 2020.

CHAPTER NINE / Debt Financing: Current and Non‐current Liabilities First US Edition

Required:

1. Record the February 15, 2019 payment.

2. Record the 2019 corporate income tax expense.

3. Record the January 31, 2020 payment.

Descriptions and general ledger account numbers are not necessary.

Show calculations where applicable.

Answer 1

Workings:

1) Total installments paid in 2019

The installment payment commenced from February through December, i.e., a total of 11 installments of $500 Each. Totally $5500 was paid during 2019.

2) Calculation of Income Tax Liability for 2019

Income before Income taxes	$      15,000.00
Income Tax Rate	40%
Total Income Tax payable for 2019	$        6,000.00
Less: Income Tax Installments paid during 2019	$      (5,500.00)
Balance income tax payable	$            500.00

Journal Entries

Note: When the installments were paid, the prepaid income tax is debited and Bank account is credited. Prepaid income tax is a current asset which will be set off against the tax payable amount during the year end when the net tax liability is determined.

Therefore, during 2019 totally 11 installments will be paid totalling to $5,500 which will be shown as a current asset and when the tax liability is determined on 12/31/2019, the balance tax payable after setting off the total installment amounts will be shown as income tax payable account (current liability) till the time it is paid.

When the payment is made on 1/31/2020, income tax payable account is debited and bank account is credited.