Question

In 2015, the initial year of its existence, Dexter Company's accountant, in preparing both the income statement and the tax return, developed the following list of items causing differences between accounting and taxable income:

1.   The company sells its merchandise on an installment contract basis. In 2015, Dexter elected, for tax purposes, to report the gross profit from these sales in the years the receivables are collected. However, for financial statement purposes, the company recognized all the gross profit in 2015. These procedures created a $750,000 difference between book and taxable incomes. The future collection of the installment contracts receivables are expected to result in taxable amounts of $375,000 in each of the next two years

2.   The company has also chosen to depreciate all of its depreciable assets on an accelerated basis for tax purposes but on a straight-line basis for accounting purposes. These procedures resulted in $90,000 excess depreciation for tax purposes over accounting depreciation.

3.   Dexter leased some of its property to Baker Company on July 1, 2015. The lease was to expire on July 1, 2017 and the monthly rentals were to be $90,000. Baker, however, paid the first year's rent in advance and Dexter reported this entire amount on its tax return. These procedures resulted in a $540,000 difference between book and taxable incomes. (Note: this lease was an operating lease and Dexter classified the unearned rent as a current liability on its balance sheet.)

4.   Dexter owns bonds issued by the State of Oregon. In 2015,Dexter showed $15,000 of income from the bonds on its income statement but did not show any of this amount on its tax return. (Note: these bonds are classified as long-term investments on Dexter's balance sheet.)

5.   In 2015, Dexter insured the lives of its chief executives. The premiums paid amounted to $18,000 and this amount was shown as an expense on the income statement. However, this amount was not deducted on the tax return. The company is the beneficiary.

Instructions

Assuming that the income statement of Dexter Company showed "Income before income taxes" of $2,250,000; that the enacted tax rates are 30% for all years; and that no other differences between book and taxable incomes existed, except for those mentioned above:

1. Compute (1) income tax payable, (2) income tax expense, (3) deferred income tax assets and (4) deferred income tax liabilities
2. Make the journal entry recording income tax expense, income taxes payable, and deferred income taxes for 2015

Answer 1

ANSWER:

Required a 1)

Computation of income tax payable:

Particulars	Amount (in $)
Pre-tax financial income	2,250,000
Permanent Difference:
State of Oregon bonds	(15,000)
Executive insurance premiums	18,000
Temporary Differences:
Installment sales	(750,000)
Excess Tax Depreciation	(90,000)
Lease Rental	540,000
Taxable Income	1,953,000‬
Less: Tax rate @30%	(585,900‬)
Income tax payable	1,367,100‬

Required a 2)

Income tax Expense = Income tax Payable + Net deferred income tax expense (benefit)

Net deferred income tax expense (benefit) = Deferred income tax liability - Deferred income tax asset

= 588,000 - 378,000 = $210,000

Income tax Expense = 1,367,100 + 210,000 = $1,577,100‬

Required a 3)

Calculation of deferred income tax assets:

Particulars	Amount(in $)
Temporary Differences
Rent	540,000
Less: Tax rate @30%	(162,000‬)
Deferred Tax Assets	378,000‬

Required a 4)

Calculation of deferred income tax liabilities:

Particulars	Amount(in $)
Temporary Differences
Installment sales	750,000
Depreciation	90,000
Total	840,000
Less: Tax rate @30%	(252,000‬)
Deferred Tax Liability	588,000‬

Required b)

The journal entry recording income tax expense, income taxes payable, and deferred income taxes for 2015:

Income Tax Expense	1,577,100
Deferred Tax Asset	378,000
To Deferred Tax Liability		588,000
To Income Tax Payable		1,367,100