Question

Problem 19-1 The following information is available for Metlock Corporation for 2017. 1. Depreciation reported on the tax return exceeded depreciation reported on the income statement by $130,000. This difference will reverse in equal amounts of $32,500 over the years 2018–2021. 2. Interest received on municipal bonds was $10,100. 3. Rent collected in advance on January 1, 2017, totaled $60,900 for a 3-year period. Of this amount, $40,600 was reported as unearned at December 31, 2017, for book purposes. 4. The tax rates are 40% for 2017 and 35% for 2018 and subsequent years. 5. Income taxes of $314,000 are due per the tax return for 2017. 6. No deferred taxes existed at the beginning of 2017. Compute taxable income for 2017. Taxable income for 2017 $ Compute pretax financial income for 2017. Pretax financial income for 2017 $ Prepare the journal entries to record income tax expense, deferred income taxes, and income taxes payable for 2017 and 2018. Assume taxable income was $942,000 in 2018. (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.) Date Account Titles and Explanation Debit Credit 2017 2018 Prepare the income tax expense section of the income statement for 2017, beginning with “Income before income taxes.” (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Metlock Corporation Income Statement (Partial) $ $ $

Answer 1

Solution :

Computation of Taxable income and pretax financial income - Metlock Corporation
Particulars	Amount
Income tax for 2017	$314,000.00
Tax rate	40%
Taxable Income	$785,000.00
Add: Book tax difference of deperciation	$130,000.00
Add: Interest received on Muncipal bonds	$10,000.00
Less: Unearned rent	$40,600.00
Pre tax financial income	$884,400.00

Journal Entries - Metlock Corporation
Date	Particulars	Debit	Credit
31-Dec-17	Income tax expense Dr	$345,290.00
	Deferred tax assets Dr ($40,600*35%)	$14,210.00
	To Income tax Payable ($785,000*40%)		$314,000.00
	To Deferred tax liability ($130,000*35%)		$45,500.00
	(To record income tax and deferred tax for 2017)
31-Dec-18	Income tax expense Dr	$325,430.00
	Deferred tax liability Dr ($32,500*35%)	$11,375.00
	To Income tax Payable ($942,000*35%)		$329,700.00
	To Deferred tax Assets($20,300*35%)		$7,105.00
	(To record income tax and deferred tax for 2018)

Metlock Corporation
Income Statement (Partial)
For year ended December 31, 2017
Particulars		Amount
Income before taxes		$884,400.00
Less: Income tax expense:
Current Tax	$314,000.00
Income tax expense - Deferred tax liability	$45,500.00
Income tax benefit - Deferred tax Assets	-$14,210.00	$345,290.00
Net Income		$539,110.00