Question

ina Company began operations at the beginning of 2021. The following information pertains to this company.

1.		Pretax financial income for 2021 is $106,000.
2.		The tax rate enacted for 2021 and future years is 20%.
3.		Differences between the 2021 income statement and tax return are listed below:
		(a)		Warranty expense accrued for financial reporting purposes amounts to $6,500. Warranty deductions per the tax return amount to $1,800.
		(b)		Gross profit on construction contracts using the percentage-of-completion method per books amounts to $97,300. Gross profit on construction contracts for tax purposes amounts to $67,900.
		(c)		Depreciation of property, plant, and equipment for financial reporting purposes amounts to $65,600. Depreciation of these assets amounts to $75,400 for the tax return.
		(d)		A $3,100 fine paid for violation of pollution laws was deducted in computing pretax financial income.
		(e)		Interest revenue recognized on an investment in tax-exempt municipal bonds amounts to $1,400.
		Taxable income is expected for the next few years. (Assume (a) is short-term in nature; assume (b) and (c) are long-term in nature.) Compute taxable income for 2021. Taxable income for 2021 Compute the deferred taxes at December 31, 2021, that relate to the temporary differences described above. Deferred tax liability $ Deferred tax asset $ Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 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.) Account Titles and Explanation Debit Credit Draft the income tax expense section of the income statement, 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).) Pina Company Income Statement (Partial)                                                                       December 31, 2021For the Year Ended December 31, 2021For the Quarter Ended December 31, 2021                                                                       CurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues $                                                                       CurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues                                                                       CurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues $                                                                       CurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues                                                                       CurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues $

Answer 1

1 Taxable income = 133,400$ (Note 1)

Tax Liability= 26,680$ (Note1)

Deferred tax Asset = 940$ (Note 2)

Deferred tax liability= 7840$(Note2)

Journal entries
Particulars	Debit	Credit
Income tax expenses(26680+(7840-940)	33,580.00
Deferred tax assets	940.00
Income tax payable		26,680.00
deferred tax liability		7,840.00

Income statement (partial)
Net income before tax (A)		106000
Less
Income tax payable	26680
Deferred tax	6900
Total (B)		33580
Net income © =(a)-(b)		72420

Notes

Note 1
Calculation of taxable income
Particulars		Amount
Pretax financial income (A)		106,000.00
Add
Warrenty expenses as per financial reporting	6,500.00
Gross profit on construction as per financial reporting	97,300.00
Depreciation for financial reporting	65,600.00
Fine on violation of pollution	3,100.00
Total (B)		172,500.00
Less
Warrenty expenses for taxation	1,800.00
gross profit on construction as per Taxation	67,900.00
Depreciation for Taxation	75,400.00
Total (c)		145,100.00
Taxable income =*A+B-c)		133,400.00
Tax rate		20%
Tax liability		26,680.00
Payment made for violation of any law for the time being is not allowed as expenses
Note 2
Calculation of deffered tax Assets/ Liability
	as per financial reporting	As per income tax	Temporary difference	Short term@20%	Long term@20%
Warranty expenses	6500	1800	4700	940
Gross profit on construction contract	97300	67900	(29,400.00)		(5,880.00)
Depreciation	65600	75400	(9,800.00)		(1,960.00)
Deffered tax(assets /liabilities)				940	(7,840.00)
claiming the expenses lesser as per the income tax as compared to Books creates future deffered tax assets
Claiming of expenses more than books creates future liability
recognition of lower revenue for tax purpose create future tax liabilty