Question

Martinez Company has the following two temporary differences between its income tax expense and income taxes payable.

		2017			2018			2019
Pretax financial income		$864,000			$917,000			$909,000
Excess depreciation expense on tax return		(30,400	)		(38,500	)		(9,800	)
Excess warranty expense in financial income		19,400			10,100			8,300
Taxable income		$853,000			$888,600			$907,500

The income tax rate for all years is 40%.

- Assuming there were no temporary differences prior to 2017, prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017, 2018, and 2019.

- Indicate how deferred taxes will be reported on the 2019 balance sheet. Martinez’s product warranty is for 12 months.

- Prepare the income tax expense section of the income statement for 2019, beginning with the line “Pretax financial income."

Answer 1

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Part 1
Date	Account	Debit	Credit
Dec 31 2017	Income Tax Expense ($864,000*40%)	$ 345,600
	Deferred Tax Assets ($19,400*40%)	$      7,760
	Income Tax Payable ($853,000*40%)		$ 341,200
	Deferred Tax Liabilities ($30,400*40%)		$    12,160
Dec 31 2018	Income Tax Expense ($917,000*40%)	$ 366,800
	Deferred Tax Assets ($10,100*40%)	$      4,040
	Income Tax Payable ($888,600*40%)		$ 355,440
	Deferred Tax Liabilities ($38,500*40%)		$    15,400
Dec 31 2019	Income Tax Expense ($909,000*40%)	$ 363,600
	Deferred Tax Assets ($8,300*40%)	$      3,320
	Income Tax Payable ($907,500*40%)		$ 363,000
	Deferred Tax Liabilities ($9,800*40%)		$      3,920
Part 2			Year 2017	Year 2018	Year 2019
	Deferred Tax Asset		$      7,760	$    11,800	$    15,120
	Deferred Tax Liabilities		$    12,160	$    27,560	$    31,480
Part 3
	Income before income tax		$ 909,000
	Income tax Expense:
	Current	$-363,000
	Deferred Tax Liability	$    -3,920
	Deferred Tax Assets	$      3,320	$-363,600
	Net Income		$ 545,400