Question

The records of Boomer Corp, in its first year of operations, at the end of 20X8, provided the following data related to income taxes.

a. Golf club dues expense in 20X8, $10,000, properly recorded for accounting purposes but not tax deductible at any time

b. Investment revenue in 20X8, $325,000, properly recorded for accounting purposes, but not taxable at any time.

c. Estimated expense for warranty costs, $70,000; accrued for accounting purposes at the end of 20X8; to be reported for income tax purposes when paid. There were no warranty cost incurred in 20X8

d. Gain on disposal of land, $240,000; recorded for accounting purposes at the end of 20X8; to be reported as a capital gain for income tax purposes when collected at the end of 20X10

e. Costs incurred for development costs, $50,000; deducted for income tax purposes; recognized for accounting purposes as depreciated. There was no depreciation of development costs in 20X8

f. Equipment purchase in 20X8, $1,500,000; depreciation $100,000 recorded for accounting purposes in 20X8; CCA of $150,000 was deducted for income tax purposes in 20X8

Accounting earnings (from the SCI) for 20X8 was $1,200,000; the income tax rate is 38%. There were no deferred tax amounts as of the beginning 20X8

Required:

1. Are the individual differences listed above permanent differences or temporary differences? Explain why.

2. Calculate Taxable Income and Tax payable.

3. Prepare the journal entry to record income tax at the end of 20X8

Answer 1

Accouting income and Taxable income are two distinct concepts. They are governed by different laws requiring different treatment for the same transaction.

Permanent differences are those differences that do not recocile at any point in time ie. A transaction is treated in different ways under the accounting and taxable income. Changes to either of them will not reverse nor will there be a corresponding change in the other. Transactions that come under this classification are: a and b

a- Allowed for accounting income but not for taxable income.

b- Allowed for accounting income but not for taxable income.

An example of a temporary timing difference is when the tax calculations and the accounting calculations of depreciation of an asset are different. This sometimes happens when the estimates of the useful life of something vary, or when different depreciation methods are used. Transactions classified under this are: C,d,and F.

c- As per accrual basis of accounting, it has been accounted in the books. Allowed under the tax laws only when paid.

d- same as c.

2. Computation of taxable income:

1. Accounting income: $1,200,000

Add:

Golf Club expenses $10,000

Warranty Expenses $70,000

Depreciation $ 100,000

Less:

Investment revenue: ($325,000)

Gain on disposal of land ( $240,000)

Depreciation ($150,000)

Taxable Income: $665,000

Tax - $665,000*38% = $252,700.

Journal Entry:

Income tax Account Dr. $252,700

To Provision for Income tax Cr. $ 252,700