Question

Michael’s Corporation Data for 2020

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 201–202 .

2. Interest received on municipal bonds was $24,000.

3. Rent collected in advance on January 1, 2020, totaled $45,000 for a 3- year period. Of this amount, $30,000 was reported as unearned at December 31, 2020, for book purposes.

4. The tax rates are 30% for 2020 and 20% for 2021 and subsequent years.

5. Income taxes of $270,000 are due per the tax return for 2020.

6. No deferred taxes existed at the beginning of 2020.

Required

(a) Compute taxable income for 2020.

(b) Compute pretax financial income for 2020.

(c) Prepare the journal entries to record income tax expense, deferred income taxes, and income taxes payable for 2020 and

2021. Assume taxable income was $760,000 in 2021.

(d) Prepare the income tax expense section of the income statement for 20 , beginning with “Income

before income taxes.”

Answer 1

a)
X x (.30) = $270,000 taxes due for 2020
Taxable Income = $270,000/30%	$ 900,000.00
b)
Taxable income [from part (a)]	$ 900,000.00
Excess depreciation	$   75,000.00
Governmental interest	$   24,000.00
Unearned rent	$  (30,000.00)
Pretax financial income for 2020	$ 969,000.00
c)
Account Titles & Explanation	Debit	Credit
Income Tax Expense (balancing)	$ 324,000.00
Deferred Tax Asset ($30,000 X .20)	6000
Income Tax Payable ($900,000 x .30)		$ 315,000.00
Deferred Tax Liability ($75,000 X .20)		$   15,000.00
Income Tax Expense (balancing)	$ 151,250.00
Deferred Tax Liability [($75,000 ÷ 4) X .20]	$     3,750.00
Income Tax Payable ($760,000 X .20)		$ 152,000.00
Deferred Tax Asset [($30,000 ÷ 2) X .20]		$     3,000.00
d)
Income before income taxes		$ 969,000.00
Income tax expense
Current	$ 270,000.00
Deffered	$     9,000.00	$ 279,000.00
Net income		$ 690,000.00