Question

PoorPerf Co. (referred to as the "company") reported (under GAAP) income before income taxes in the amount of $100 (I'm making the math simple, you can add thousands or millions if you prefer to work with big numbers). You've been assigned to prepare the journal entry recording income tax expense and related assets and liabilities for the year ending 12/31/2017. You receive the following additional information, which may or may not be relevant to your task:

The CFO drives a Jaguar.

The company received an advance payment of $25 from a customer for work to be performed in 2018. Under the tax code, that payment is taxable when received.

Depreciation expense (GAAP) reflected in income before tax is $20. The company's tax department tells you that depreciation on the company's tax return will be $25.

The company recorded $2 on interest income on municipal bonds.

The company has a factory located in a country that has no income tax. Assume that there is no U.S. federal income tax on the earnings of that factory, which amounted to $30.

The company's federal tax rate is 21%. Ignore state and local income taxes for this problem.

Required:

Calculate income tax expense, income taxes payable, deferred tax (asset, liability or combined). You can show this as a journal entry, or any other means so long as your answers are clearly identified.

Calculate PoorPerf's effective tax rate.

Answer 1

1	Income tax calculation
	Income before income taxes		100.00
	Add:
	Advance from customers taxable on receipt basis		25.00
	Depreciation as per books		20.00
	Less:
	Depreciation as per tax code		(25.00)
	Interest income on municipal bonds expempt from federal tax		(2.00)
	Earnings of factory exempt from federal taxes		(30.00)
	Taxable income		88.00
	Federal tax rate		21%
	Federal tax		18.48
2	Deferred tax calculation
	Deferred assets
	Advance from customers taxable on receipt basis		25.00
			25.00
	Deferred Liabilities
	Difference in depreciation -books vs tax code		5.00
			5.00
	Net deferred (assets)/liabilities		20.00
	Net deferred tax (assets)/liabilities		4.20
3	Income tax expenses
	- current tax		18.48
	- deferred tax (asset)/liabilities		(4.20)
			14.28