Question

Denver Co. at the end of 20x1, its first year of operations, prepared reconciliation between pretax financial income and taxable income as follows:

Pretax financial income                                                                       $300,000

Extra depreciation taken for tax purposes                                             900,000

Estimated litigation expenses deductible for taxes when paid           1,500,000

Rent collected on the tax return is greater than rent reported on

the income statement by $220,000                                                  

Interest income from Denver municipal bonds                                    100,000

           

Use of the depreciable assets will result in taxable amounts of $300,000 in each of the next three years. The estimated litigation expenses of $1,500,000 will be deductible in 20x4 when settlement is expected.        

1. Compute the taxable income.

2.Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 20x1, assuming a tax rate of 40% for all years.

Answer 1

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Part -1
Pre Tax Financial Income		$     300,000
Less: Extra Depreciation in Tax		$   -900,000
Add: Estimated Litigation		$ 1,500,000
Add: Rent		$     220,000
Less: interest Income on Municipal Bond		$   -100,000
Taxable Income		$ 1,020,000
Part -2
Temporary Differences	Future Taxable/deductible	Tax Rate	Defeerred Tax Asset	Defeerred Tax Liabilities
Depreciation	$                                        900,000	40%		$                                   360,000
Litigation	$                                    1,500,000	40%	$                          600,000
Journal Entry:
	Debit	Credit
Tax Expense	$                                      -168,000
Defeerred Tax Asset	$                                        600,000
Defeerred Tax Liabilities		$     360,000
Tax Payable (1020000*40%)		$     408,000