Question

You are the accountant for ADO Corporation, and you have to prepare the journal for income taxes. You have gathered the following information for 2020:

1. Pretax financial income (i.e., pretax GAAP income) is $520,000.

2. The tax rate for 2020 is 40%.

3. Depreciation expense on the tax return is $13,000 greater than on the GAAP income statement.

4. One of the corporation’s executives died in a plane crash. ADO received life insurance benefits of $40,000.

5. Rent revenue on the tax return (i.e., rent collected) is $35,000 higher than rent revenue (i.e., rent earned) on the GAAP income statement.

Instructions

(a)     Compute taxable income. Clearly list all differences between pretax financial and taxable income, and indicate whether they are permanent or temporary.

(b)     Prepare the journal entry to record income taxes for 2020.

Answer 1

Answer
Explanation :
a)
Computation of taxable income - ADO Corporation
Particulars	Amount
Pretax financial income	$                                      5,20,000
Permanent differences:
Life insurance premium	$                                         40,000
Temporary differences:
Excess of book depreciation over tax depreciation	$                                         13,000
Excess warranty expense accrued over warranty paid	$                                         35,000
Taxable Income	$                                      6,08,000

b)
Journal Entries
Event	Particulars	Debit	Credit
1	Income tax expense Dr	$        2,24,000
	Deferred tax liability Dr ($13,000*40%)	$             5,200
	Deferred tax assets Dr ($35,000*40%)	$           14,000
	To Income taxes payable ($608,000*40%)		$        2,43,200
	(To record income tax and deferred taxes for the year)