Question

Bridgeport Corporation ended its first fiscal year on December 31, 2020, reporting a pretax income for accounting purposes of $2,538,000. All of Bridgeport’ products were sold with a two-year warranty included. Bridgeport recorded $626,000 of warranty expense for accounting purposes in 2020, including $376,000 of actual warranty costs incurred during the year plus $250,000 in estimated warranty liability for the remainder of the warranty period. Estimated liabilities are not deductible for tax purposes. Bridgeport was subject to a 25% income tax rate and follows IFRS.

Calculate Bridgeport Ltd.’s taxable income and income tax payable for 2020.

Taxable Income $

Income Taxes Payable $

Prepare the journal entries to record the 2020 current and deferred income taxes. (Credit account titles are automatically indented when the 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.) Account Titles and Explanation Debit Credit (To record current tax expense.) (To record deferred tax expense.)

Answer 1

For Deferred Tax Calculation.

First we should understand that there is difference between Accounting Income and Taxable Income.

• Accounting Income is calculated by complying IFRS ( i.e. preparation of books of account).
• Although we pay Tax on Taxable Income which is determined according to Tax Laws.
• Difference between Taxable Income and Accounting Income arises due to timing differences.
• On these timing difference we create deferred tax asset/ deferred tax liability and these deferred tax asset / liability will be set off against tax payable / receivable in upcoming years.

  (Figures in $)

Calculation of Taxable Income

Pretax Accounting Income 2,538,000

Add : Timing difference due to

disallowance of estimated liabilities 250,000   

Taxable Income 2,788,000

Tax Payable = Taxable Income * Tax rate

= 2,788,000 * 0.25

   = 697,000

Deferred Tax Assets = 250,000 * 0.25 = 62,500

Journal

1. Statement Profit and Loss A/c ................ Dr 697,000

To Current tax 697,000

( Being Tax Payable on Taxable Income )

2. Deferred Tax Assets A/c....................Dr 62,500

To Statement of Profit and Loss A/c 62,500

(being deferred tax assets created)