Question

MASCO MANUFACTURING CO.
Income Statement
For The Period Ending 12-31-2017
Revenues:
	Sales		1500000
	Municipal Interest Revenue		9000
Expenses:
	Cost of Goods Sold	600000
	Wages	250000
	Utilities	30000
	Insurance	10000
	Rent	100000
	Depreciation	30000
	EPA Violation Fine	6000
	Bond Interest Paid	19000
	Billboard Advertising	50000
	Accrued Warranty Expenses	70000
	Accrued Year-end Bonuses	60000
			1225000
	Pre Tax Financial Income		284000
Notes:
1	Excess of book over Tax Depreciation is $30,000 in 2017.
2	Equipment bought for $150,000 on January 1, 2015 has a useful life of 5 years.
	It is being depreciated straight-line for book purposes.
	Tax Depreciation Schedule: 60,000 in 2015, $50,000 in 2016 and $40,000 in 2017
3	$20,000 was received in December 2017 for a job to be done in January 2018
Required:
1	Prepare a Book-Tax Depreciation Schedule for the asset acquired on January 1, 2015
2	Show a detailed General Ledger Account for the DTL Depreciation Account.
3	Prepare a Book to Tax Reconcilation in good form.
4	Record Income Tax Expense for the year ended December 31, 2017.

Answer 1

1.  Book-Tax Depreciation Schedule for the asset acquired on January 1, 2015

Book depreciation = 150,000/5 = $30,000 per year

Year	Book depreciation	Tax depreciation
2015	30,000	60,000
2016	30,000	50,000
2017	30,000	40,000
2018	30,000	-
2019	30,000	-

2.

Assumed tax rate = 25%

For year 2015,

Book Depreciation = $30,000

Tax Depreciation = $60,000

Difference in Depreciation = 30,000

Difference in tax (25%) = $7,500

This is deferred tax liability due to depreciation = $7,500

For year 2016,

Book Depreciation = $30,000

Tax Depreciation = $50,000

Difference in Depreciation = 20,000

Difference in tax (25%) = $5,000

This is deferred tax liability due to depreciation = $5,000

For year 2017,

Book Depreciation = 30,000 = $30,000

Tax Depreciation = $40,000

Difference in Depreciation = 10,000

Difference in tax (25%) = $2,500

This is deferred tax liability due to depreciation = $2,500

So, DTL balance at the year 2017 = 7,500 + 5,000 + 2,500 = $15,000

Deferred tax liability - Depreciation account

Particulars	Debit	Particulars	Credit
		Tax Expense - Deferred	7,500
		Tax Expense - Deferred	5,000
		Tax Expense - Deferred	2,500
Bal c/f	15,000
Total	15,000	Total	15,000

3.

For the year 2017,

Book Pre tax financial income = $284,000

Add - Cash received for a service to be done next year = 20,000

Income = $304,000

Tax as per books (25%) = $76,000

Book Pre tax financial income = $284,000

Add - Depreciation = $30,000

Less - Tax Depreciation = 40,000

Add - Cash received in advance - 20,000 (As per IRS, Prepaid income, such as compensation for future services, is generally included in your income in the year you receive it. However, if you use an accrual method of accounting, you can defer prepaid income you receive for services to be performed before the end of the next tax year. In this case, you include the payment in your income as you earn it by performing the services. )

Income = 294,000

Tax as per IRS (25%) = $73,500

4.

Income Tax Expense entry

Tax Expense - Current	73,500
Income Tax Payable		73,500
Tax Expense - Deferred	2,500
Deferred tax liability		2,500