Question

Pina Company began operations at the beginning of 2021. The following information pertains to this company.

1.		Pretax financial income for 2021 is $85,000.
2.		The tax rate enacted for 2021 and future years is 20%.
3.		Differences between the 2021 income statement and tax return are listed below:
		(a)		Warranty expense accrued for financial reporting purposes amounts to $7,600. Warranty deductions per the tax return amount to $1,900.
		(b)		Gross profit on construction contracts using the percentage-of-completion method per books amounts to $95,500. Gross profit on construction contracts for tax purposes amounts to $68,100.
		(c)		Depreciation of property, plant, and equipment for financial reporting purposes amounts to $58,500. Depreciation of these assets amounts to $87,800 for the tax return.
		(d)		A $3,800 fine paid for violation of pollution laws was deducted in computing pretax financial income.
		(e)		Interest revenue recognized on an investment in tax-exempt municipal bonds amounts to $1,600.
4.		Taxable income is expected for the next few years. (Assume (a) is short-term in nature; assume (b) and (c) are long-term in nature.)

Compute taxable income for 2021.

Taxable income for 2021

$

Compute the deferred taxes at December 31, 2021, that relate to the temporary differences described above.

Deferred tax liability		$
Deferred tax asset		$

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

Account Titles and Explanation	Debit	Credit

Draft the income tax expense section of the income statement, beginning with “Income before income taxes.” (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Pina Company
Income Statement (Partial)

Answer 1

Solution 1:

Pina Company
Computation of Taxable income and income tax for 2021
Particulars	Amount
Pretax financial Income	$85,000.00
Permanent differences:
Fine for Pollution	$3,800.00
Interest revenue on municipal bonds	-$1,600.00
Temorary differences:
Less: Excess of depreciation as per tax over books	-$29,300.00
Add: Warranty expense in books higher than as per tax	$5,700.00
Less: Gross profit as per books higher than as per tax on construction contracts	-$27,400.00
Taxable Income	$36,200.00
Income tax (20%)	$7,240.00

Solution 2:

Deferred tax assets = $5,700*20% = $1,140

Deferred tax liability = ($29,300 + $27,400) * 20% = $11,340

Solution 3:

Pina Company
Journal Entries
Date	Particulars	Debit	Credit
31-Dec-21	Income tax expense Dr	$17,440.00
	Deferred Tax Assets Dr ($5,700*20%)	$1,140.00
	To Income Tax Payable		$7,240.00
	To Deferred tax liability ($56,700*20%)		$11,340.00
	(Being current income tax and deferred taxes)

Solution 4:

Pina Company
Income tax expense section of Income Statement - 2021
Particulars		Amount
Income before Tax		$85,000.00
Income Tax Expense:
Current	$7,240.00
Deferred tax Liability	$11,340.00
Deferred tax Assets	-$1,140.00	$17,440.00
Net Income		$67,560.00