Question

1. Charlotte, Inc. began business on January 1, 2017. Its pretax financial income for the first two year was as follows:

2017	$150,000
2018	100,000

The following Items cased the only differences between pretax financial income and taxable income.

i. In 2017, the company collected $105,000 of rent; of this amount, $35,000 was earned in 2017; the other $70,000 will be earned equally over the 2018-19 period. The full $105,000 was included in the taxable income in 2017.

ii. In 2017, the company reported depreciation expense in its financial statements of $80,000. Depreciation expense for tax purposes was 110,000. The difference will revere evenly over the next three years (2018-2020).

The tax rate in 2017 is 30% and no tax rate changes are enacted during the three year period.

Required:

a. Determine taxable income for 2017 and 2018.

b. Determine the deferred income taxes at the end of 2017, and prepare the journal entry to record income taxes for 2017.

c. Determine the deferred income taxes at the end of 2018, and prepare the journal entry to record income taxes for 2018.

d. Prepare the Income Tax section of the income statement, starting with Pretax Net Income and ending with Net Income after Taxes for both 2017 and 2018.

Answer 1

Solution a:

Charlotte, Inc.
Computation of Taxable income and income tax for 2017
Particulars	Amount
Pretax financial Income	$150,000.00
Temorary differences:
Less: Excess of depreciation as per tax over books	-$30,000.00
Add: Rent collected on the tax return is greater than rent recognized on the income statement	$70,000.00
Taxable Income	$190,000.00
Income tax (30%)	$57,000.00

Charlotte, Inc.
Computation of Taxable income and income tax for 2018
Particulars	Amount
Pretax financial Income	$100,000.00
Temporary differences:
Add: Excess of depreciation as per books over tax	$10,000.00
Less: Rent earned in the income statement is greater than rent collected	-$35,000.00
Taxable Income	$75,000.00
Income tax (30%)	$22,500.00

Solution b:

Charlotte, Inc.
Journal Entries
Date	Particulars	Debit	Credit
31-Dec-17	Income tax expense Dr	$45,000.00
	Deferred Tax Assets Dr ($70,000*30%)	$21,000.00
	To Income Tax Payable		$57,000.00
	To Deferred tax liability ($30,000*30%)		$9,000.00
	(Being current income tax and deferred taxes)

Solution c:

Charlotte, Inc.
Journal Entries
Date	Particulars	Debit	Credit
31-Dec-18	Income tax expense Dr	$30,000.00
	Deferred Tax Liability Dr ($10,000*30%)	$3,000.00
	To Income Tax Payable		$22,500.00
	To Deferred tax Assets ($35,000*30%)		$10,500.00
	(Being current income tax and deferred taxes)

Solution d:

Charlotte, Inc.
Income tax expense section of Income Statement - 2017
Particulars		Amount
Income before Tax		$150,000.00
Income Tax Expense:
Current	$57,000.00
Deferred tax Liability	$9,000.00
Deferred tax Assets	-$21,000.00	$45,000.00
Net Income		$105,000.00

Charlotte, Inc.
Income tax expense section of Income Statement - 2018
Particulars		Amount
Income before Tax		$100,000.00
Income Tax Expense:
Current	$22,500.00
Reversal of deferred tax liability	-$3,000.00
Reversal of deferred tax Asset	$10,500.00	$30,000.00
Net Income		$70,000.00