Question

Review the following information for Acco Brands relating to the year 2018.

1. Income taxes of $270,000 are due for the 2018 tax year. The tax rates are 30% for 2018.
2. Depreciation reported on the tax return exceeded depreciation reported on the income statement by $75,000. This difference will reverse in equal amounts of $25,000 over the years 2019 thru 2021.
3. Interest received on municipal bonds was $24,000
4. Advanced rent collected on January 1, 2018 totaled $45,000 for a 3 year period. Of this amount, $30,000 was reported unearned at December 31, 2018, for book purposes.
5. No deferred taxes existed at the beginning of 2018.

A. Compute taxable income for 2018.
B. Compute pretax financial income for 2018.
C. Prepare journal entries to record income tax expense, deferred income taxes, and income taxes payable for 2018.
D. Prepare the income tax expense section of the income statement for 2018, beginning with “Income before income taxes.”

Answer 1

Solution A:

Taxable income = Income tax due / tax rate = $270,000 / 30% = $900,000

Solution B:

Computation of Pretax financial income - ACCO Brand
Particulars	Amount
Taxable income for 2018	$900,000.00
Permanent differences:
Interest received on municipal bonds	$24,000.00
Temporary differences:
Add: Depreciation as per tax higher than depreciation as per income tax	$75,000.00
Less: Unearned rent	-$30,000.00
Pretax financial income for 2018	$969,000.00

Solution C:

Journal Entries - Acco Brand
Date	Particulars	Debit	Credit
31-Dec-18	Income tax expense Dr	$283,500.00
	Deferred tax Assets Dr ($30,000*30%)	$9,000.00
	To Income tax payable ($900,000*30%)		$270,000.00
	To Deferred tax liability ($75,000*30%)		$22,500.00
	(To record income tax expense and deferred taxes)

Solution D:

Income Statement (Partial) ACCO Brand For 2018
Particulars		Amount
Pre tax financial income		$969,000.00
Income tax Expense:
Current tax	$270,000.00
Deferred tax Liability	$22,500.00
Deferred tax Assets	-$9,000.00
		$283,500.00
Net Operating Income		$685,500.00