Question

Question 8

The following information has been obtained for Concord Corporation.

1.		Prior to 2020, taxable income and pretax financial income were identical.
2.		Pretax financial income is $1,742,000 in 2020 and $1,496,000 in 2021.
3.		On January 1, 2020, equipment costing $1,256,000 is purchased. It is to be depreciated on a straight-line basis over 5 years for tax purposes and over 8 years for financial reporting purposes. (Hint: Use the half-year convention for tax purposes, as discussed in Appendix 11A.)
4.		Interest of $55,000 was earned on tax-exempt municipal obligations in 2021.
5.		Included in 2021 pretax financial income is a gain on discontinued operations of $183,000, which is fully taxable.
6.		The tax rate is 20% for all periods.
7.		Taxable income is expected in all future years.

Prepare the journal entry to record 2021 income tax expense, income taxes payable, and deferred taxes. (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.)

Prepare the bottom portion of Concord’s 2021 income statement, beginning with “Income from continuing operations before income taxes.” (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Indicate how deferred income taxes should be presented on the December 31, 2021, balance sheet.

Answer 1

A. Computation of Taxable Income and Income Tax Payable for 2021

Particulars Amount
Pre-tax financial income 1,496,000
Add Dep as per Books (1,256,000 / 8 years) 157,000
Less Dep as per IT (1,256,000 / 5 years) -251,200
Less Exempt Interest Income municipal obligations -55,000
Taxable Income 1,346,800
Income Tax Payable @ 20% 269,360
B. Journal Entry to record 2021 income tax expense, income tax payable and deferred taxes

Income Tax as per Pre-tax financial Income (1,496,000*20%) 299,200
Income Tax as per Taxable Income (1,346,800*20%) 269,360
Here, Pre-tax financial income is higher than Taxable income. So, it will create deferred tax liability.

Because in accounts, we have to book Income tax as per Pre-tax financial income and we pay Income tax as per Taxable Income. So balance is deferred tax liability, which we need to pay in future.

Account Titles & Explanation Debit Credit
Income Tax Expense 299,200
Income Tax Payable 269,360
Deferred Tax Liability 29,840

C. Income Statement

Martinex Corporation
Income Statement (Partial)
For the Year December 31, 2021
Income from Continuing operations before income taxes 1,496,000
Income Tax -299,200
Income from continuing Operations (I) 1,196,800
Discontinued Operations (II)
Gain on discontinued Operations 183,000
Net Income ( III = I + II ) 1,379,800
D. Balance Sheet

Martinex Corporation
Balance Sheet (Partial)
December 31,2021
Non-current Liabilities
Deferred Tax Liability 29,840
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