Question

Question 7

The following information is available for Skysong Corporation for 2020.

1.		Depreciation reported on the tax return exceeded depreciation reported on the income statement by $124,000. This difference will reverse in equal amounts of $31,000 over the years 2021–2024.
2.		Interest received on municipal bonds was $9,600.
3.		Rent collected in advance on January 1, 2020, totaled $59,700 for a 3-year period. Of this amount, $39,800 was reported as unearned at December 31, 2020, for book purposes.
4.		The tax rates are 40% for 2020 and 35% for 2021 and subsequent years.
5.		Income taxes of $333,000 are due per the tax return for 2020.
6.		No deferred taxes existed at the beginning of 2020.

1. Compute taxable income for 2020.

2. Compute pretax financial income for 2020.

3. Prepare the journal entries to record income tax expense, deferred income taxes, and income taxes payable for 2020 and 2021. Assume taxable income was $1,063,000 in 2021. (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.)
4.  Prepare the income tax expense section of the income statement for 2020, beginning with “Income before income taxes.” (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Answer 1

1.

Particulars	$
Income tax expenses	$        333,000
Income tax rate	40%
Taxable income	$        832,500

2.

Particulars	$
Taxable income	$        832,500
Add Excess depreciation as per tax	$        124,000
Add Exempt income from municipal bonds	$            9,600
Less Advance rent taxed	$        (39,800)
Pretax financial income	$        926,300

3.

Workings: -

Computation of deferred tax
Particulars	$
Temporary differences
Excess depreciation as per tax (DTL)	$        124,000
Advance rent for 2 years taxed (DTA)	$          39,800
Net Deferred tax liabilities	$          84,200
Future enacted rate	35%
Deferred tax expense for 2020 (DTL)	$          29,470
Particulars	$
Temporary differences for 2021
Opening balance (DTL)	$          29,470
Reversal of DTL due to depreciation (31000 X 0.35)	$        (10,850)
Reversal of DTA due to Advance rent ($19,900 x 0.35)	$            6,965
Net Deferred tax liabilities closing	$          25,585
Deferred tax revenue for 2021 ($29,470 - $25,585)	$            3,885
Particulars	$
Taxable income for 2021	$     1,063,000
Tax rate	35%
Income tax payable for 2021	$        372,050

Date	Particulars	Debit $	Credit $
Dec 31st, 2020	Income tax expense	$        333,000
	Income tax payable		$     333,000
Dec 31st, 2020	Deferred tax expense	$          29,470
	Deferred tax liability		$        29,470
Dec 31st, 2021	Income tax expense	$        372,050
	Income tax payable		$     372,050
Dec 31st, 2021	Deferred tax liability	$            3,885
	Deferred tax revenue		$          3,885

5.

Income statement for 2020 (Partial)
Particulars	$
Income before income taxes	$        926,300
Less Income tax expenses
Current income tax	$      (333,000)
Deferred tax	$        (29,470)
Income after income taxes	$        563,830

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