Question

Purple Co. began business on January 1, 2020. The following items caused the only differences between pretax financial income and taxable income.

1. On January 2, 2020, heavy equipment costing $800,000 was purchased. The equipment had a life of 4 years and no salvage value. The straight-line method of depreciation is used for book purposes and the tax depreciation taken each year is listed below:

                                                      Tax Depreciation                                        

              2020              2021                 2022                   2023                Total    

            $360,000         $180,000          $140,000          $120,000          $800,000

2. On January 2, 2020, $360,000 was collected in advance for rental of a building for a two-year period. The entire $360,000 was reported as taxable income in 2020, but $180,000 of the $360,000 was reported as unearned revenue at December 31, 2020 for book purposes.

3. In 2020, the company had an accounts receivable of $420,000 for goods that had been delivered to the customer in 2020. It will be collected in 2021.

4. Purple Co. deducts insurance expense of $210,000 for tax purposes in 2020, but the expense is not yet recognized for accounting purposes. In 2021, 2022, and 2023, no insurance expense will be deducted for tax purposes, but $70,000 of insurance expense will be reported for accounting purposes in each of these years.

The enacted tax rates existing at December 31, 2021 are:

2020                 20%                             2022                 30%

            2021                20%                              2023                30%

                                                                        2024                30%

Instructions:

1. For items 1)-4), indicate whether it involves a deferred tax asset, deferred tax liability, or permanent difference.

1):                    2):                    3):                    4):                    

Purple’s taxable income for 2020 was $900,000. Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2020. Show your work.

Answer 1