Question

E19-4. (Three Differences, Compute Taxable Income, Entry for Taxes) (LO 1, 2) Zurich Company reports pretax financial income of $70,000 for 2017. The following items cause taxable income to be different than pretax financial income. 1.Depreciation on the tax return is greater than depreciation on the income statement by $16,000. 2.Rent collected on the tax return is greater than rent recognized on the income statement by $22,000. 3.Fines for pollution appear as an expense of $11,000 on the income statement. Zurich's tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2017

. Instructions

(a) Compute taxable income and income taxes payable for 2017.

(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017.

(c) Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income taxes.”

Answer 1

Solution a:

Computation of Taxable Income for 2017 - Zurich Company
Particulars	Amount
Pre Tax Financial Income	$70,000.00
Less: Depreciation difference for book and tax purpose	$16,000.00
Add: Unearned Rent	$22,000.00
Add: Fines for pollution	$11,000.00
Taxable income for 2017	$87,000.00

Solution b:

Adjusting Journal Entries - Zurich Company
Particulars	Debit	Credit
Income tax Expense Dr	$24,300.00
Deferred Tax Assets Dr ($22,000*30%)	$6,600.00
To Income Tax Payable ($87,000*30%)		$26,100.00
To Deferred Tax Liability ($16,000*30%)		$4,800.00

Solution c:

Income Statement Partial (Zurich Company)
Particulars		Amount
Income before Income Taxes		$70,000.00
Less: Income Tax Expense:
Current Income Tax	$26,100.00
Deferred tax liability	$4,800.00
Deferred tax Assets	-$6,600.00	$24,300.00
Income after taxes		$45,700.00