Question

Exercise 19-18 Larkspur Inc., in its first year of operations, has the following differences between the book basis and tax basis of its assets and liabilities at the end of 2016. Book Basis Tax Basis Equipment (net) $367,000 $306,000 Estimated warranty liability $191,000 $ 0 It is estimated that the warranty liability will be settled in 2017. The difference in equipment (net) will result in taxable amounts of $18,700 in 2017, $31,500 in 2018, and $10,800 in 2019. The company has taxable income of $497,000 in 2016. As of the beginning of 2016, the enacted tax rate is 34% for 2016–2018, and 30% for 2019. Larkspur expects to report taxable income through 2019. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit Income Tax Expense Deferred Tax Asset Income Tax Payable 168980 Deferred Tax Liability SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Indicate how deferred income taxes will be reported on the balance sheet at the end of 2016. Larkspur Inc. Balance Sheet Deferred Tax Asset $

Answer 1

Solution:

Computation of Deferred tax Liabilities and Deferred tax assets - Larkspur Inc.
Particulars	2017	2018	2019	Total
Temporary difference giving rise to future taxable amount	$18,700.00	$31,500.00	$10,800.00
Enacted tax rate	34%	34%	30%
Deferred tax liability	$6,358.00	$10,710.00	$3,240.00	$20,308.00
Temporary difference giving rise to future deductible amount	$191,000.00	$0.00	$0.00
Deferred tax assets	$64,940.00	$0.00	$0.00	$64,940.00

Journal Entries - Larkspur Inc.
Particulars	Debit	Credit
Income tax expense Dr	$124,348.00
Deferred tax assets Dr	$64,940.00
To Income tax payable ($497,000*34%)		$168,980.00
To Deferred tax liability		$20,308.00
(To record income tax and deferred tax)

Balance Sheet (Partial)
Cheyenne Inc.
As on December 31, 2016
Liabilities	Amount	Assets	Amount
Non Current Liabilities:
Deferred Tax Liability	$13,950.00
Current Liability:		Current Assets
Deferred tax Liability	$6,358.00	Deferred Tax Assets	$64,940.00