Question

1. The following differences enter into the reconciliation of financial income and taxable income of Abbott Company for the year ended December 31, 2020, its first year of operations. The enacted income tax rate is 20% for all years.

         Pretax accounting income                                                                  $800,000

         Excess tax depreciation                                                                      (480,000)

         Litigation accrual                                                                                      70,000

         Unearned rent revenue deferred on the books but appropriately

               recognized in taxable income                                                            60,000

         Interest income from New York municipal bonds                           (20,000)

         Taxable income                                                                                    $430,000

1.   Excess tax depreciation will reverse equally over a four-year period, 2021-2024.

2.   It is estimated that the litigation liability will be paid in 2024.

3.   Rent revenue will be recognized during the last year of the lease, 2024.

4.   Interest revenue from the New York bonds is expected to be $20,000 each year until their maturity at the end of 2024.

(a)   Prepare a schedule of future taxable and (deductible) amounts.

(b)   Prepare a schedule of the deferred tax (asset) and liability at the end of 2020.

(c)   Since this is the first year of operations, there is no beginning deferred tax asset or liability. Compute the net deferred tax expense (benefit).

(d)   Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2020.

Answer 1

a)
Future Taxable and Deductible Amounts
	2021	2022	2023	2024	Total
Depreciation	120000	120000	120000	120000	480000
Litigation				-70000	-70000
Unearned Rent				-60000	-60000

b)Schedule of the deferred tax (asset) and liability at the end of 2020:

			Deferred Tax
Temporary Differences	Future Taxable (deductible) Amounts	Tax Rate	Asset	Liability
Depreciation	480000	20%		96000
Litigation	-70000	20%	-14000
Unearned rent	-60000	20%	-12000
Total	350000		-26000	96000

c)Net Deferred tax expense (benefit):

Deferred Tax Expense	96000
Deferred Tax benefit	-26000
Net deferred tax expense	70000

d)Journal Entries to record income tax expense, deferred taxes and the income taxes payable for 2020

Income Tax Expense	156000
Deferred Tax Asset	26000
Deferred Tax Liability		96000
Income Tax Payable (430,000*20%)		86000