Question

Question 8

The following information has been obtained for Concord Corporation.

1.		Prior to 2020, taxable income and pretax financial income were identical.
2.		Pretax financial income is $1,742,000 in 2020 and $1,496,000 in 2021.
3.		On January 1, 2020, equipment costing $1,256,000 is purchased. It is to be depreciated on a straight-line basis over 5 years for tax purposes and over 8 years for financial reporting purposes. (Hint: Use the half-year convention for tax purposes, as discussed in Appendix 11A.)
4.		Interest of $55,000 was earned on tax-exempt municipal obligations in 2021.
5.		Included in 2021 pretax financial income is a gain on discontinued operations of $183,000, which is fully taxable.
6.		The tax rate is 20% for all periods.
7.		Taxable income is expected in all future years.

Prepare the journal entry to record 2021 income tax expense, income taxes payable, and deferred taxes. (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.)

Prepare the bottom portion of Concord’s 2021 income statement, beginning with “Income from continuing operations before income taxes.” (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Indicate how deferred income taxes should be presented on the December 31, 2021, balance sheet.

Answer 1

Answer :

(a). Computation of Taxable income and income tax payable for 2021

-	Particulars	Amount
	Pre-tax financial income	1,496,000
Add	Dep as per books (1,256,000/8 years)	157,000
Less	Dep as per It (1,256,000/5 years)	-251,200
Less	Exempt Interest Income muncipal obligations	-55,000
	Taxable income	1,346,800
	income tax payable@20%	269,360

(b) journal entry to record 2021 income tax expense ,income tax payable and deferred taxes

Income tax as per Pre-tax financial income(1,496,000*20%)	299,200
Income tax as per Taxable income (1,346,800*20%)	269,360

Here, Pre-tax financial income is higher than taxable income.So,it will create deferred tax liability. Because in accounts, we have to book income tax as per Pre - tax financial income and we pay income tax as per taxable income, so balance is deferred tax liability, which we need to pay in future.

Accounts Titles and Explanation	Debit	Credit
Income Tax Expense	299,000	-
Income Tax Payable	-	269,360
Deferred Tax Liability	-	29,840

(c). Income statement

Martinex Corporation

Income Statement (Partial)

For the year December 31.2021

Income from continuing operations before income taxes	1,496,000
Income Tax	-299,200
Income from continuing operations (i)	1,196,800
Discountinued operations (ii)	-
Gain on discountinued operations	183,000
Net income (iii = i +ii)	1,379,800

(d).

Balance sheet

Martinex Corporation

Balance Sheet (Partial)

December 31.2021

Non - Current Liabilities	-
Deferred Tax Liability	29,840