Question

11. The following differences enter into the reconciliation of financial income and taxable income of Abbott Company for the year ended December 31, 2020, its first year of operations. The enacted income tax rate is 20% for all years. Pretax accounting income $800,000 Excess tax depreciation (480,000) Litigation accrual 70,000 Unearned rent revenue deferred on the books but appropriately recognized in taxable income 60,000 Interest income from New York municipal bonds (20,000) Taxable income $430,000

1. Excess tax depreciation will reverse equally over a four-year period, 2021-2024.

2. It is estimated that the litigation liability will be paid in 2024.

3. Rent revenue will be recognized during the last year of the lease, 2024.

4. Interest revenue from the New York bonds is expected to be $20,000 each year until their maturity at the end of 2024.

Instructions (a) Prepare a schedule of future taxable and (deductible) amounts. (b) Prepare a schedule of the deferred tax (asset) and liability at the end of 2020. (c) Since this is the first year of operations, there is no beginning deferred tax asset or liability. Compute the net deferred tax expense (benefit). (d) Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2020.

Answer 1

The answers for the above questions are as follows;

a) Schedule of future taxable and (deductible) amounts;

Year	2021	2022	2023	2024	Total
Depreciation (480000/4)	120000	120000	120000	120000	480000
Litigation				(70000)	(70000)
Unearned rent				(60000)	(60000)

b) Schedule of the Deferred tax (asset) and liability at the end of 2020;

Temporary differences	Future Taxable/ (Deductible) Amounts	Tax Rate	Deferred Tax (Asset)	Deferred Tax Liability
Depreciation	480000	20%		96000
Litigation	(70000)	20%	(14000)
Unearned rent	(60000)	20%	(12000)
Total	350000		(26000)	96000

c) Computation of deferred tax expense/(benefits);

Net deferred tax expense = Deferred tax expense - Deferred tax benefits

Therefore, net deferred tax expense = 96000-26000

= 70000

Deferred tax expense -: 96000

Deferred tax benefit. -: (26000)

Net deferred tax exp. -: 70000

d) Journal entry to record income tax expense, deferred taxes and the income taxes payable for 2020;

Dr. Income tax expense(430000*20%+70000).. 156000

Dr. Deferred tax asset ......................................... 26000

Cr. Deferred tax liability ....................................... 96000

Cr. Income tax payable (430000*20%)................ 86000