Question

Harry Potter Inc., information for 2019:

1. 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 2020–2021 .

2. Interest received on municipal bonds was $24,000. 3. Rent collected in advance on January 1, 2019, totaled $45,000 for a 3-year period. Of this amount, $30,000 was reported as unearned at December 31, 2019, for book purposes.

4. The tax rates are 20% for 2019 and 30% for 2020 and subsequent years. 5. Income taxes of $270,000 are due per the tax return for 2019.

6. No deferred taxes existed at the beginning of 2019.

Required

(a) Compute taxable income for 2019.

(b) Compute pretax financial income for 2019.

(c) Prepare the journal entries to record income tax expense, deferred income taxes, and income taxes payable for 2019 and 2020. Assume taxable income was $760,000 in 2019 (d) Prepare the income tax expense section of the income statement for 2019 , beginning with “Income before income taxes.”

Answer 1

	Harry porter Taxable Income and other details
a)	Compute taxable Income 2019
	Income Tax $	2,70,000
	Tax rate 2019	20%
	Taxable income ($270000/20%) $	13,50,000
b)	Compute Pre Tax Financial Income 2019
	Taxable income ( as calculated above)	13,50,000
	Excess depreciation	75,000
	Government Interest	24,000
	Unearned rent	-30,000
	Compute Pre Tax Financial Income 2019	14,19,000
c)	Journal Entries	Debit ($)	Credit($)
	Income Tax expenses ( balancing Number)	2,79,000
2019 tax rate-20%	Deferred Tax Asset ($30000*20%)	6,000
	Income Tax payable (1350000*20%)		2,70,000
	Deferred Tax Liability($75000*20%)		15,000
	Income Tax expenses ( balancing Number)	2,26,875
2020 tax rate 30%	Deferred Tax Liability($75000/4*30%)	5,625
	Income Tax payable (760000*30%)		2,28,000
	Deferred Tax Asset ($30000/2*30%)		4,500
c)	Income before Income Tax		Amnt($)
	Pre Tax income ( as calculated above)		14,19,000
	Current Tax	2,70,000
	Deferred tax	9,000	2,79,000
	Net Income		11,40,000