Question

At the end of its first year of operations on December 31, 2018, the Hondo Company reported the following information for the year: (Assume any deferred tax assets are more likely than not to be realized).

Pretax income for financial reporting purposes	$360,000
Municipal bond interest revenue on State of Texas bonds	12,000
Warranty expense for financial reporting purposes Warranty repair costs during period	30,000 10,000
Excess of MACRS Depreciation for tax purposes above straight line for financial reporting purposes	36,000
Officer’s life insurance premium expense	4,000
Sales with an accrual basis profit for 2018 Installment basis profit for tax reportable for 2018*	50,000 20,000
Fines for pollution violations	5,000
Subscription revenues received in advance of product delivery	15,000
The income tax rate for current and future years	30%

*Remainder reportable in 2019

Required:

a. Determine taxable income

b. Prepare the income tax journal entr(ies) for the company at the end of 2018 including both current and deferred taxes

c. What was total income tax expense for 2018 and show how it would be presented in the income statement starting with income before taxes for financial reporting purposes.

Answer 1

a	Determine taxable income
	Pretax income for financial reporting purposes	$360,000
	Less: Municipal bond interest	$12,000
	Excess of MACRS Depreciation above straight line	$36,000
	Sales with an accrual basis profit for 2018	$30,000	(50000-20000)
	Subscription revenues received in advance of product delivery	$15,000
		$93,000
	Add: Warranty expense (liability provision)	$20,000	(30000-10000)
	Officer's life insurance premium expense	$4,000
	Fine for pollution violation	$5,000
		$29,000
	Taxable income	$296,000
b	Income tax Journal entry
	Current Income tax expenses	$88,800
	Deferred Income tax expenses	$24,300
	Deferred Income tax liability		$6,000
	Income tax payable		$107,100
	Current income tax expenses = taxable income x tax rate
	= 296000 x 30% = $88800
	Deferred tax asset = Future taxable incomextax rate
	(36000+3000+15000) x 30% = $24300
	Deferred tax liability = future deductions x tax rate
	= 20000 x 30% = 6000 (Warranty expense)
	Income tax payable = (Pretax income +/- Permanent difference)xtax rate
	(360000-12000+5000+4000) x 30% = 107100
c	Total income tax expenses for 2018 is $88800
	Presentation on income statement
	Income before tax	$360,000
	Income tax expense	$88,800
	Net income	$271,200
	Deferred tax asset and deferred tax liability will be shown on balance sheet and
	not on income statement.