Question

1. The following differences enter into the reconciliation of financial income and taxable income of Abbott Company for the year ended December 31, 2020, its first year of operations. The enacted income tax rate is 20% for all years. Pretax accounting income $800,000 Excess tax depreciation (480,000) Litigation accrual 70,000 Unearned rent revenue deferred on the books but appropriately recognized in taxable income 60,000 Interest income from New York municipal bonds (20,000) Taxable income $430,000

1. Excess tax depreciation will reverse equally over a four-year period, 2021-2024.

2. It is estimated that the litigation liability will be paid in 2024.

3. Rent revenue will be recognized during the last year of the lease, 2024.

4. Interest revenue from the New York bonds is expected to be $20,000 each year until their maturity at the end of 2024.

(a) Prepare a schedule of future taxable and (deductible) amounts.

(b) Prepare a schedule of the deferred tax (asset) and liability at the end of 2020.

(c)   Since this is the first year of operations, there is no beginning deferred tax asset or liability. Compute the net deferred tax expense (benefit).

(d)   Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2020.

Answer 1

a)	Schedule of future taxable and (deductible)
	2021	2022	2023	2024	Total
Future taxable (deductible) amounts:
Depreciation	$ 120,000.00	$ 120,000.00	$ 120,000.00	$ 120,000.00	$ 480,000.00
Litigation				$ (70,000.00)	$ (70,000.00)
	Unearned rent				$ (60,000.00)	$ (60,000.00)
b)
	Schedule of the deferred tax (asset) and liability
	Future Taxable (Deductible)	Tax rate		Deferred Tax
Temporary Differences			(Asset)	Liability
Depreciation	$ 480,000.00	20%		$   96,000.00
Litigation	$ (70,000.00)	20%	$ (14,000.00)
	Unearned rent	$ (60,000.00)	20%	$ (12,000.00)
Totals	$ 350,000.00	20%	$ (26,000.00)	$   96,000.00
c)
	Deferred tax expense	$   96,000.00
Deferred tax benefit	$ (26,000.00)
Net deferred tax expense	$   70,000.00
d)
Account Titles & Explanation	Debit	Credit
Income Tax Expense (balancing)	$ 156,000.00
Deferred Tax Asset	$   26,000.00
Deferred Tax Liability		$   96,000.00
Income Taxes Payable ($430,000 × 20%)		$   86,000.00