Question

Comprehensive Income     Total Impact on NI     Realized Gain/Loss     Unrealized Gain/Loss         Total Impact on CI

Section III - Income Taxes (45 points)

- XYZ began business on 1/1/18. During that year, they had pre-tax financial accounting income of$96,000 and paid $800 of officer life insurance (company is the beneficiary). The accountant has determined that a truck purchased in 2018 for $25,000 will be depreciated as follows:

                                                                2018                 2019                 2020                 2021                 2022

Financial Statement $5,000 $5,000 $5,000      5,000 5,000 Tax Return $9,000 $7,000 $4,000 $ 3,000      2,000

Prepare the journal entry to record income taxes for 2018. Assume that the tax rate for 2018 and beyond is 40%.

- In 2019, XYZ had a financial accounting income of 360,000, which includes $800 of municipal income which is not taxable. In addition to the depreciation differences discussed above, the pre-tax income also includes an unrealized holding loss of $25,000 that cannot be deducted for tax purposes until the security is sold. All securities are held in a trading portfolio.

Prepare the journal entries to record income taxes for 2019. Assume that the tax rate for 2019 and beyond remains at 40%.

- In 2020, XYZ had a financial accounting income of $500,000.. In addition to the depreciationdifference discussed in 2018, $9,000 of the security loss recorded in 2019 was realized in 2020 when some of the securities were sold. Also, in 2020 XYZ adopted the installment sales method for tax purposes and $22,000 of profit recognized in 2020 will be taxable in a future year when the related receivables are collected.

Pre pare the journal entries to record income taxes for 2020. Assume that the tax rate for 2020 has been changed, effective 1/1/2020 to 30% and that the new rate is expected to remain in effect for all future years.

Answer 1

	2018	2019	2020
Pre Tax income	96,000.00	360,000.00	500,000.00
Depreciation	(4,000.00)	(2,000.00)	1,000.00
Municipal Bond interest		(800.00)
Unrealised Holding loss		25,000.00	(9,000.00)
Installment Sales			(22,000.00)
Taxable Income	92,000.00	382,200.00	470,000.00
Tax Rate	40%	40%	30%
Tax	36,800.00	152,880.00	141,000.00

	2018	2019	2020
Book Depreciation	5,000.00	5,000.00	5,000.00
Income Tax depreciation	9,000.00	7,000.00	4,000.00
Timing difference	(4,000.00)	(2,000.00)	1,000.00
	DTL	DTL	Reversal of DTL
Deferred Tax	(1,600.00)	(800.00)	300.00
Unrealised Holding loss		25,000.00	(9,000.00)
		DTA	Reversal of DTA
Deferred Tax		10,000.00	(2,700.00)
Installment Sales			(22,000.00)
			DTL
Deferred Tax			(6,600.00)
Reversal of Excess Deferred Tax on Unrealised Holding Loss			(2,500.00)
Reversal of Excess Deferred Tax on Depreciation			600.00

Date	Account Description	Debit	Credit
2018	Income Tax	36,800.00
	Income Tax payable		36,800.00
2018	Deferred Tax	1600
	Deferred Tax Liability		1600
2019	Income Tax	152,880.00
	Income Tax payable		152,880.00
2019	Deferred Tax	800
	Deferred Tax Liability		800
2019	Deferred Tax Assets	10000
	Deferred Tax		10000
2020	Income Tax	141,000.00
	Income Tax payable		141,000.00
2020	Deferred Tax	6,600.00
	Deferred Tax Liability		6,600.00
2020	Deferred Tax Liability	300
	Deferred Tax		300
2020	Deferred Tax	2,700.00
	Deferred Tax Assets		2,700.00
2020	Deferred Tax	2,500.00
	Deferred Tax Assets		2,500.00
2020	Deferred Tax Liability	600.00
	Deferred Tax		600.00

In 2020 I have passed multiple deferred tax entry for each item for better understanding. But we can also pass consolidated entry as below:

Date	Account Description	Debit	Credit
2020	Deferred Tax	10,900.00
	Deferred Tax Liability		5,700.00
	Deferred Tax Assets		5,200.00

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