Question

The following information is available for Vandal Corporation for 2019. There is no Beginning deferred taxes.                                                                                               

1. Depreciation reported on the tax return exceeded depreciation reported on the income statement by $3,540,000. This difference will reverse in equal amounts of $708,000 over the years 2020-2024.

2. Vandal accrues a loss and a related liability of $4,130,000 due to a pending litigation in 2019.         

3. Life insurance proceeds from a key executive is $20,650,000.                                            

4. Rent collected in advance on January 1, 2019, totaled $6,490,000 for a 4-year period. Of this amount, $1,622,500 was reported as earned at December 31, 2019 for book purposes.

5. The tax rates are 30% for 2019 and 20% for 2020 and subsequent years.   

6. Pretax Financial income for 2019 is $149,122,500. .                                              

7. The company was fined $7,375,000 for pollution.                    

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

                                                                                               

Instructions:                                                                                    

(a) Compute taxable income for 2019 (8 points).                                                                                           

(b) Prepare the journal entries to record income tax expense, deferred income taxes, and income taxes payable for 2019 and 2020. Assume taxable income is $103,250,000 in 2020 (12 points).

(c) Prepare the income tax expense section of the income statement for 2019, beginning with "Income before income taxes." (6 points)                                                                          

                                                                                               

Answer 1

a)Taxable Income for 2019

Pretax financial income for 2019	149,122,500.00
Pollution Fine	7,375,000.00
Unearned rent	4,867,500.00
Life Insurance proceeds	-    20,650,000.00
Litigation Cost	4,130,000.00
Excess depreciation	-      3,540,000.00
Taxable Income	141,305,000.00

b)

		Debit	Credit
2019	Income Tax Expense	49,197,150.00
	Deferred Tax Asset	967,600.00
	Income Tax Payable		49,456,750.00
	Deferred Tax Liability		708,000.00
2020	Income Tax Expense	21,381,600.00
	Deferred Tax Liability	141,600.00
	Income Tax Payable		20,650,000.00
	Deferred Tax Asset		873,200.00

c)

Income before income taxes	149,122,500.00
Income tax expense	49,197,150.00
Net Income	99,925,350.00