Question

home / study / business / accounting / accounting questions and answers / johnny bravo company began operations in 2015 and has provided the following information. pretax ...

Question: Johnny Bravo Company began operations in 2015 and has provided the following information. Pretax ...

Johnny Bravo Company began operations in 2015 and has provided the following information.

Pretax financial income for 2015 is $100,000.

The tax rate enacted for 2015 and future years is 40%.

Differences between the 2015 income statement and tax return are listed below.

Warranty expense accrued for financial reporting purposes amounts to $5,000. Warranty deductions per the tax return amount to $2,000.

Gross profit on construction contracts using the percentage-of-completion method for book purposes amounts to $92,000. Gross profit on construction contracts for tax purposes amounts to $62,000.

Depreciation of property, plant, and equipment for financial reporting purposes amounts to $60,000.

Depreciation of these assets amounts to $80,000 for the tax return.

A $3,500 fine paid for violation of pollution laws was deducted in computing pretax financial income.

Interest revenue earned on an investment in tax-exempt municipal bonds amounts to $1,400.

Taxable income is expected for the next few years.

1. prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2015.

2. Draft the income tax expense section of the income statement, beginning with “Income before income taxes”

Prepare the journal entries to record the following.
Date	Account Title				Amount	Amount
	Account Title
Provide a one line explanation for the reason why the journal entry has been made.
Date	Account Title				Amount	Amount
	Account Title
Provide a one line explanation for the reason why the journal entry has been made.
Date	Account Title				Amount	Amount
	Account Title
Provide a one line explanation for the reason why the journal entry has been made.
Date	Account Title				Amount	Amount
	Account Title
Provide a one line explanation for the reason why the journal entry has been made.
Date	Account Title				Amount	Amount
	Account Title
Provide a one line explanation for the reason why the journal entry has been made.
Date	Account Title				Amount	Amount
	Account Title
Provide a one line explanation for the reason why the journal entry has been made.

Answer 1

Solution 1:

Schedule of Pretax financial income and taxable income - Johnny Bravo Company
Particulars		Amount
Pretax financial income		$100,000.00
Permanent differences:
Muncipal Bond interest revenue	-$1,400.00
Pollution fines	$3,500.00	$2,100.00
Temporary differences:
Depreciation Expense ($80,000 - $60,000)	-$20,000.00
Warranty Expense ($5,000 - $2,000)	$3,000.00
Gross profit on construction contract ($92,000 - $62,000)	-$30,000.00	-$47,000.00
Taxable Income		$55,100.00

Journal Entries - Johnny Bravo Company
Particulars	Debit	Credit
Income tax expense Dr	$40,840.00
Deferred tax assets Dr ($3,000*40%)	$1,200.00
To Income tax payable ($55,100*40%)		$22,040.00
To Deferred tax liability ($50,000*40%)		$20,000.00
(To record income tax and deferred tax for the year)

Solution 2:

Income Statement (Partial)
Johnny Bravo company
Particulars		Amount
Income before income taxes		$100,000.00
Income tax expense:
Current tax	$22,040.00
Deferred tax liability	$20,000.00
Deferred tax assets	-$1,200.00	$40,840.00
Net Income		$59,160.00