Question

Harms Way Company (HWC) provides you with the following information for the year ended October 31, 2019. Your assignment is to calculate income tax expense, income taxes payable, and deferred income tax assets/liabilities. The end result will be a journal entry to record all of that. In addition, you must calculate HWC’s effective tax rate and prepare a reconciliation to the federal statutory rate of 21%. Information provided: 1. Income before tax, as shown on HWC’s GAAP statement of income = $2,110,000 2. Depreciation calculated under GAAP = $300,000. Depreciation as will be shown on the tax return = $375,000. 3. Interest income on municipal bonds, which is not subject to federal income tax = $150,000. 4. Fines recorded and paid during the year to the EPA for environmental violations = $450,000. Fines are not tax deductible. 5. Meals and entertainment expenses recorded during the year = $375,000. Only one-half (50%) of those expenses may be deducted for tax purposes. 6. At the end of the fiscal year (in October 2019), HWC received a payment of $750,000 from a client for a product to be delivered in November. Under the newest tax law, that payment is taxable when received, not when the product is delivered. Your Assignment: Calculate: • Income tax expense (GAAP). • Income taxes currently payable. • Deferred income taxes resulting from this year’s operations, classified as deferred tax assets and separately deferred tax liabilities (don’t worry about the current/noncurrent classification, just asset/liability).

Answer 1

	Calculation of Taxable Income
1	Income Before Tax	$        2,110,000
	Add: Depreciation as per books(Disallowed)	$            300,000
	Less: Depreciation as per tax(Allowed)	$         (375,000)
	Less: Interest income on municipal bonds(Not taxable as per federal income tax to be deducted)	$         (150,000)
	Add: Fines recorded and paid during the year to the EPA for environmental violations (Disallowed)	$            450,000
	Add: Meals and entertainment exp(Half disallowed)	$            187,500
	Add: Payment received to be deducted on cash basis	$            750,000
		$        3,272,500
	Income befor tax as per GAAP	$        2,110,000
2	Income Tax Expense as per GAAP= 2110000*21%	$            443,100
3	Income tax currently payable= Taxable Income* Tax rate= 3272500*21%	$            687,225
	Tax rate=21%
4	Deferred Tax Assets
	Taxable Income	$        3,272,500
	Less: Profit as per Books	$        2,110,000
		$        1,162,500
	Deferred Tax asset @ 21%	$            244,125
	Since the taxable income is more than the books income so there is a deferred expense to be recorded which is deferred asset.
5	Journal Entry
i	Profit & Loss A/c------------------------------Dr.                              To , Provison for Income Tax(Current Tax) (Being provision created for current tax at accounting income)	$            443,100
ii	Deferred Tax Assets A/c-------------------Dr.                                  To, Profit & Loss A/c (being deferred tax asset created at 21%)	$            244,125
6	Effective Rate= Total Tax expense/ Earning before taxes
	687225/2110000*100	32.57%
7	Reconciliation
	Applicable Tax rate	21%
	Tax effect of deferred tax asset created(244125/2110000)	11.57%
		32.57%