Question

In 2017, XYZ Corporation has $75,000 of income before taxes in its accounting records.   In computing income tax expense, XYZ makes the following observations of differences between the accounting records and the tax return:

An accelerated depreciation method is used for tax purposes.  In 2017, XYZ reports $6,000 more depreciation expense for tax purposes than it shows in the accounting records.

In 2017, XYZ collected $60,000 from a business that is renting a portion of its warehouse.  The $60,000 covers the rental payment for the four years 2018-2022, and therefore no rental revenue has been recognized for 2017.  However, XYZ must pay taxes on the entire amount collected in 2017.

The enacted tax rate in 2017 is 35%.  In 2018, a new tax rate is enacted, changing the rate from 35% to 22% for years beginning January 1, 2019.

Required:

        A.     Calculate taxable income for 2017.

        B.     Prepare the journal entry necessary to record income taxes at the end of 2017.

        C.    How would any deferred tax amounts be reported on a classified balance sheet?

        D.     Assume that XYZ’s 2018 pretax accounting income is $9,000 and that XYZ reports $3,000 more depreciation expense for tax purposes than it shows in the accounting records.  Also during 2018, XYZ invests in tax-free municipal bonds that earn $3,000 interest in 2018.  Prepare the journal entry necessary to record income taxes at the end of 2018.

E.    What is the amount of net income or loss that XYZ would report on its 2018 income statement?  

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Answer 1

requirement a

Accounting income	$       75,000
Accelerated depreciation	$       (6,000)
Advance rentals	$       60,000
Taxable income	$   1,29,000

Requirement b

income tax expense	$       32,100
Deferred tax assets	$       15,150
To deferred tax liability		$         2,100
To income tax payable		$       45,150
(Being tax expenses recorded)

Requirement c

Balance sheet
Liabilities
Deferred tax liabilities	$    2,100
Assets
Deferred tax assets	$ 15,150

Requirement d

income tax expense	$         3,270
To Deferred tax libilities		$             660
To deferred tax assets		$         2,610
(Being tax expenses recorded)

Requirement e

Acounting income		$      9,000
Tax Expenses
Current tax	$                -
DTL due to Accelerated depreciation	$             660
DTA reversal on rentals	$         5,250
DTA on carried forwarded losses	$       (2,640)
		$      3,270
net income		$      5,730