Question

Arbuckle Incorporated started operations on January 1, 2016 and purchased $1,000,000 of equipment. The income tax rate was 40% in both years. The following information related to 2017 and 2018:

Year	2017	2018
Accounting income before income tax	$275,000	$410,000
Golf club dues	5,000	6,000
Accrued warranty costs	25,000	60,000
Warranty costs paid	20,000	45,000
Depreciation expense on equipment	100,000	100,000
Capital cost allowance	150,000	125,000

a)Calculate taxable income and income tax payable for each year.

           

b)Prepare journal entries to record the taxes for each year.

Date	Account Titles	Debit	Credit

Answer 1

a) Calculation of Taxable Income and Income Tax Payable (Amounts in $)

	2017	2018
Accounting income before income tax (A)	275,000	410,000
Permanent Differences:
Add: Golf club dues	5,000	6,000
Total Permanent differences (B)	5,000	6,000
Accounting Income for tax expense (C = A+B)	280,000	416,000
Tax Expense (C*40%)	112,000	166,400
Temporary Differences:
Add: Accrued warranty costs	25,000	60,000
Less: Warranty costs paid	20,000	45,000
Add: Depreciation expense on equipment	100,000	100,000
Less: Capital cost allowance	150,000	125,000
Total Temporary Differences (D)	(45,000)	(10,000)
Taxable Income (E = A+B+D)	235,000	406,000
Tax rate (F)	40%	40%
Income Tax Payable (E*F)	94,000	162,400

b) Journal Entries (Amounts in $)

Date	Account Titles	Debit	Credit
12/31/2017	Income Tax Expense	112,000
	Deferred Tax Liability (112,000-94,000)		18,000
	Income Tax Payable		94,000
	(To record income tax expense for 2017)
12/31/2018	Income Tax Expense	166,400
	Deferred Tax Liability (166,400-162,400)		4,000
	Income Tax Payable		162,400
	(To record income tax expense for 2018)