Question

In 2018, the initial year of its existence, Dexter Company's accountant, in preparing both the income statement and the tax return, developed the following list of items causing differences between accounting and taxable income:

1.The company sells its merchandise on an installment contract basis. In 2018, Dexter elected, for tax purposes, to report the gross profit from these sales in the years the receivables are collected. However, for financial statement purposes, the company recognized all the gross profit in 2018. These procedures created a $750,000 difference between book and taxable incomes. The future collection of the installment contracts receivables are expected to result in taxable amounts of $375,000 in each of the next two years. (Note: the company treats installment contracts receivable as a current asset on its balance sheet.)

2.The company has also chosen to depreciate all of its depreciable assets on an accelerated basis for tax purposes but on a straight-line basis for accounting purposes. These procedures resulted in $90,000 excess depreciation for tax purposes over accounting depreciation. The temporary difference due to excess tax depreciation will reverse equally over the three year period from 2019-2021.

3.Dexter leased some of its property to Baker Company on July 1, 2018. The lease was to expire on July 1, 2020 and the monthly rentals were to be $90,000. Baker, however, paid the first year's rent in advance and Dexter reported this entire amount on its tax return. These procedures resulted in a $540,000 difference between book and taxable incomes. (Note: this lease was an operating lease and Dexter classified the unearned rent as a current liability on its balance sheet.)

4.Dexter owns $300,000 of bonds issued by the State of Oregon upon which 5% interest is paid annually. In 2018, Dexter showed $15,000 of income from the bonds on its income statement but did not show any of this amount on its tax return. (Note: these bonds are classified as long-term investments on Dexter's balance sheet.)

5.In 2018, Dexter insured the lives of its chief executives. The premiums paid amounted to $18,000 and this amount was shown as an expense on the income statement. However, this amount was not deducted on the tax return. The company is the beneficiary.

Instructions

Assuming that the income statement of Dexter Company showed "Income before income taxes" of $1,500,000; that the enacted tax rates are 30% for all years; and that no other differences between book and taxable incomes existed, except for those mentioned above:

1.Compute the income taxes payable.

2.Prepare a schedule of future taxable and (deductible) amounts at the end of 2018.

3.Prepare a schedule of deferred tax (asset) and liability at the end of 2018.

4.Compute the net deferred tax expense (benefit) for 2018.

Answer 1

Company derives its book profits from the financial statements i.e income statement and it calculates its taxable profit based on Income-tax return.

There is a difference between the book income and taxable profit because of certain items which are specifically allowed and disallowed for tax purpose.

l.No	Entity Profit Status	Entity – Current	Entity – Future
1	Book profit higher than the Taxable profit	Pay less tax now	Pay more tax in future
2	Book profit is less than the Taxable profit	Pay more tax now	Pay less tax in future

Based on this concept, answer to part 1 is as below:

		in $
	Accounting Income before income taxes	1,500,000.00
Less :	Difference on account of installment Contract sale, tax on this amount will be paid in future years	750,000.00
Less	When the depreciation rate per Income tax act is higher than the depreciation rate per accounting income, entity will end up paying less tax for the current period. , tax on this amount will be paid in future years	90,000.00
Add	Advance Monthly rental	90,000.00
Less	5% annual interest income from Bonds, tax on this amount will be paid in future years	15,000.00
Add	Premiums paid for Insurance amount of chief executives	18,000.00
	Total Taxable income	753,000.00
	Income tax payable @ 30%	225,900.00

Answer to part 2

	Future taxable Income	in $
1	Difference on account of installment Contract sale, tax on this amount will be paid in future years	750,000.00
2	When the depreciation rate per Income tax act is higher than the depreciation rate per accounting income, entity will end up paying less tax for the current period. , tax on this amount will be paid in future years	90,000.00
3	5% annual interest income from Bonds, tax on this amount will be paid in future years	15,000.00
	Total Taxable income	855,000.00

	Future Deductibe amounts	in $
Add	Advance Monthly rental	90,000.00
Add	Premiums paid for Insurance amount of chief executives	18,000.00
	Future Deductibe amounts	108,000.00

Answer to Part 3

l.No	Entity Profit Status	Entity – Current	Entity – Future	Effect
1	Book profit higher than the Taxable profit	Pay less tax now	Pay more tax in future	Creates Deferred Tax Liability (DTL)
2	Book profit is less than the Taxable profit	Pay more tax now	Pay less tax in future	Creates Deferred Tax Asset (DTA)

	Deffered Tax Liability	in $		DTL
		Future taxable income		Deffered Tax Liability @ 30%
1	Difference on account of installment Contract sale, tax on this amount will be paid in future years	750,000.00		225,000.00
2	When the depreciation rate per Income tax act is higher than the depreciation rate per accounting income, entity will end up paying less tax for the current period. , tax on this amount will be paid in future years	90,000.00		27,000.00
3	5% annual interest income from Bonds, tax on this amount will be paid in future years	15,000.00		4,500.00
	Deffered Tax Liability	855,000.00		256,500.00

	Deffered tax Asset @ 30%	in $
		Future Deductibe amounts		Deffered tax Asset @ 30%
Add	Advance Monthly rental	90,000.00		27,000.00
Add	Premiums paid for Insurance amount of chief executives	18,000.00		5,400.00
	Future Deductibe amounts	108,000.00		32,400.00

Answer to Part 4

Calculation of Net deferred tax expense
	Deffered Tax Liability	256,500.00
Less	DTA	32,400.00
	Net Deferred tax expense	224,100.00