Question

Pretax Accounting information - Coby Construction - 2017
pretax accounting income					200
permanent differences
	municipal bond interest				10
timing difference
	depreciation on the tax return				180
	depreciation on the income  statement				60
	warranty expenses paid in 2017				40
	estimated warranty expenses deducted
	on the income statement				110
(You need to know whether to add or subtract the above differences)
tax rate 40%
Assume in the future, tax rates will be 35% in 2019
and 30% in 2020 and thereafter.
Timing differences will reverse themselves in equal amounts
over the next 4 years (2018-2021)
Prepare the journal entry for tax expense in 2017

Answer 1

Solution:

Computation of Taxable Income and Income Tax for 2017 - Coby Construction
Particulars	Amount (In million)
Pretax accounting income	$200.00
Less: Muncipal bond interest	$10.00
Add: Depreciation on incomes statement	$60.00
Less: Depreciation on tax return	$180.00
Add: estimated warranty expenses deducted in income statement	$110.00
Less: Warranty expenses paid	$40.00
Taxable Income - 2017	$140.00
Income tax Payable (40%)	$56.00

Computation of Deferred Tax Liability
Year	Reversible Taxable Temporary Differences	Tax Rate	Deferred tax liability
2018	$30.00	40%	$12.00
2019	$30.00	35%	$10.50
2020	$30.00	30%	$9.00
2021	$30.00	30%	$9.00
Total			$40.50

Computation of Deferred Tax Assets
Year	Reversible deductible Temporary Differences	Tax Rate	Deferred tax Assets
2018	$17.50	40%	$7.000
2019	$17.50	35%	$6.125
2020	$17.50	30%	$5.250
2021	$17.50	30%	$5.250
Total			$23.625

Adjusting Journal Entries - Coby Construction
Particulars	Debit	Credit
Income tax expense Dr	$72.88
Deferred tax assets Dr	$23.63
To Income tax payable		$56.00
To Deferred tax liability		$40.50
(Being income tax expense recorded for 2018)