Question

Luxley Corporation has $150,000 of income before taxes in its 2020 accounting records. In computing income tax expense, Luxley makes the following                                          
observations of differences between the accounting records and the tax return:                                          
                                          
1.     An accelerated depreciation method is used for tax purposes. In 2020, Luxley reports $12,000 more depreciation expense for tax purposes                                           
than it shows in the accounting records. The excess depreciation is expected to reverse in 2023.                                          
                                          
2.     In 2020, Luxley collected $120,000 from a business that is renting a portion of its warehouse. The $120,000 covers the rental payment                                           
for the four years 2021-2024, and therefore no rental revenue has been recognized for 2020. However, XYZ must pay taxes on the entire                                           
amount collected in 2020.                                          
                                          
The enacted tax rate in 2020 is 21%. It is 23% in 2021 and in 2022, and is 24% in 2023 and years following.                                          
                                          
Required:                                          
a.   Calculate taxable income for 2020.                                       
                                          
b.   Prepare the journal entry necessary to record income taxes at the end of 2020.                                        
                                          
c.   How would any deferred tax amounts be reported on a classified balance sheet?                                        
                                          
d.   Assume that Luxley’s 2021 pretax accounting income is $27,000 and that Luxley reports $6,000 more depreciation expense                                       
   for tax purposes than it shows in the accounting records, expected to reverse in 2024. Also during 2021, Luxley invests in tax-free                                       
   municipal bonds that earn $9,000 interest in 2021. Prepare the journal entry necessary to record income taxes at the end of 2021.                                        
                                          
e.   What is the amount of net income or loss that Luxley would report on its 2021 income statement and how will it be reported?                    

Answer 1

	LUXLEY CORPORATION
a.	CALCULATION OF INCOME AS PER TAX LAWS
	Net Income as per Accounting	$1,50,000
	Add: Additional Depreciation For Tax Purposes	$12,000
	Add: Rental Income	$1,20,000
	TAXABLE INCOME FOR 2020	$2,82,000
b.	CALCULATION OF INCOME TAX FOR THE YEAR 2020
	Taxable Income For 2020	$2,82,000
	Tax Rate	21%
	Income Tax For the Year          =$ 282000*21%	$59,220
c.	Deferred Tax for 2020
	Additional Depreciation	$12,000
	Expected to be recovered in 2023
	Tax Rate for 2023	24%
	Deferred Tax Liability to be Recoginsed	$2,880
	Rental Income	$1,20,000
	Expected to be recovered from 4 years
	Tax Rate	21%
	Deferred Tax Asset to be Recognised	$25,200
	Net Deferred Tax Asset for the Year 2020 =$25200-$2880	$22,320
d.	LUXLEY TAXABLE INCOME FOR 2021
	Pretax Accounting Income	$27,000
	Add: Additional Depreciation for Tax Purposes	$6,000
	Less: Interest of Tax Free Bonds	-$9,000
	Taxable Income for the Year 2021	$24,000
	Income Tax for the Year 2021	23%
	Income Tax Payable for the Year 2021 = $24000 * @23%	$5,520
	JOURNAL ENTRY FOR INCOME TAX EXPENSE
	Income Tax Expense a/c…………………Dr	$5,520
	TO Income Tax Payable A/c.	$5,520
	(Being Income tax Expense recognised for the Year and Liability for the same Recorded).
e.	In the Income Statement of Luxley Corporation
	Net Income before Tax for the Year 2021	$27,000
	Less: Income tax for the Year	-$5,520
	Less: Deferred Tax for the Year*	-$1,380
	Net Income after Tax for the Year 2021	$20,100
	Deferred Tax for Year 2021
	Additional Depreciation	$6,000
	Expected to be recovered in 2023
	Tax Rate for 2023	23%
	Deferred Tax Liability to be Recoginsed	$1,380