Question

I NEED CALCULATION/PROCESSES TO UNDERSTAND IT.

Company A reports pretax financial income of $100,000 for 2019. The following items caused taxable income to be different than pretax financial income.

1. $5,000 of life insurance carried by the company on key officers.
2. Estimated warranty liability is $20,000 for accounting purposes and $0 for tax purposes.
3. Depreciation for tax purposes exceeds depreciation for accounting purposes by $25,000.

Company A's tax rate is 25% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2019.

Instructions:

1. Compute taxable income and income taxes payable for 2019.

2. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2019.

Description	Debit	Credit

Answer 1

Particulars	Amount	× tax rate	Deferred tax expense/ (benefit)	Current tax
Pre tax financial income	$        100,000
Add/ (less):
Life insurance premium	$            5,000	0%	$                   -
Warranty accrual	$          20,000	25%	$           (5,000)
Excess tax depreciation	$         (25,000)	25%	$            6,250
		25%		$          25,000
Taxable income/ tax liability	$        100,000		$            1,250	$          25,000

Account	Debit	Credit
Current tax expense	$          25,000
Deferred tax expense	$            1,250
Deferred tax asset	$            5,000
Income taxes payable		$          25,000
Deferred tax liability		$            6,250
(entry to record income taxes)