Question

Carla Company has the following two temporary differences between its income tax expense and income taxes payable.

		2020			2021			2022
Pretax financial income		$864,000			$949,000			$920,000
Excess depreciation expense on tax return		(30,800)			(41,000)			(9,600)
Excess warranty expense in financial income		20,900			10,500			8,300
Taxable income		$854,100			$918,500			$918,700

The income tax rate for all years is 20%.

Assuming there were no temporary differences prior to 2020, prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2020, 2021, and 2022.

Indicate how deferred taxes will be reported on the 2022 balance sheet. Carla’s product warranty is for 12 months.

Prepare the income tax expense section of the income statement for 2022, beginning with the line “Pretax financial income.”

Answer 1

Pretax financial income       920,000      
Income tax expense             
Current   183,740          
Deferred (1920 - 1660)   260    184,000      
Net Income       736,000      

Working:

Year   Particulars   Debit    Credit      
2020   Income Tax Expense   172,800          
   Deferred Tax Asset (20,900 * 20%)   4,180          
   Deferred Tax Liability (30,800 * 20%)       6,160      
   Income Taxes Payable (854,100 * 20%)       170,820      
                 
2021   Income Tax Expense   189,800          
   Deferred Tax Asset (10,500 * 20%)   2,100          
   Deferred Tax Liability (41,000 * 20%)       8,200      
   Income Taxes Payable (918,500 * 20%)       183,700      
                 
2022   Income Tax Expense   184,000          
   Deferred Tax Asset (8300 * 20%)    1,660          
   Deferred Tax Liability (9600 * 20%)       1,920      
   Income Taxes Payable (918,700 * 20%)       183,740