Question

Zenon Corp. began business on January 1, 2013. Its pretax financial income for the first 2 years was as follows

2013 2014

$240,000    $560,000

The following items caused the only differences between pretax financial income and taxable income.

In 2013, the company collected $180,000 of rent; of this amount, $60,000 was earned in 2013; the other $120,000 will be earned equally over the 2014–2015 period. The full $180,000 was included in taxable income in 2013.

2. The company pays a $10,000 fine for pollution.

3. In 2014, the company terminated a top executive and agreed to $90,000 of severance pay. The amount will be paid $30,000 per year for 2014–2016. The 2014 payment was made. The $90,000 was expensed in 2014. For tax purposes, the severance pay is deductible as it is paid.

4. The company pays insurance premiums for its key officers of $8000 in 2014 and 2015. Although not tax deductible, the company expenses the premiums for book purposes.

The enacted tax rates existing at December 31, 2013 are:

2013 35%

2014 40%

2015 45%

2016 45%

Instructions

(a) Determine taxable income for 2013 and 2014.

(b) Determine the deferred income taxes at the end of 2013, and prepare the journal entry to record income taxes for 2013.

(c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2014.

(d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2014.

(e) Compute the net deferred tax expense (benefit) for 2014.

(f) Prepare the journal entry to record income taxes for 2014.

Answer 1

a. Taxable income:

	2013	2014
Pretax Financial income	240,000	560,000
Timing Differences
Rent deferred in books	120,000	(60,000)
Severance pay		(60,000)
	120,000	(120,000)
Permanent Differences
Fine for pollution	10,000	10,000
Keyman Insurance premium		8,000
	10,000	18,000
Taxable Income	370,000	458,000
Tax payable @35%	129,500	160,300

b. Deferred income taxes and Journal entry for 2013:

Tax payable 129,500

Tax on timing differences = 42,000 (120,000*35%0

Income tax expense = 87,500 (129,500-42,000)

Journal entry to record income tax expense	2013
Income tax expense Dr	87,500
Deferred tax Asset Dr	42,000
To Taxes payable		129,500

c.

Schedule for future Deductible items at the end of 2014	2015	2016
Rent deferred in books	60,000	-
Schedule for future taxable items at the end of 2014
Severance pay	30,000	30,000

d. Schdule for DTA and DTL:

Deferred tax Asset	2013	2014	2015	2016
Future deductible amount at the end of year	120,000	60,000	-	-
Deferred tax asset	42,000	21,000	-	-
Future taxable amount at the end of year	-	60,000	30,000	-
Deferred tax liability		21,000	13,500	-

Note: Deferred tax liability at the end of 2015 will be adjusted to the current tax rate of 45%, it is 30,000*45%, which will be paid in 2016

e.Deferred tax expense dor 2014 is on the Severance pay, 60,000*35% = 21,000

Deferred tax benefit is on the rent which was taxed in 2013 $60,000*35% = 21,000

f.

Income tax expense Dr		202,300
To Taxes Paid			202,300
Income tax expense Dr		21000
To Deferred tax liability			21000
Income tax expense Dr		21000
To Deferred tax Asset			21,000