Question

Information for Entity A for the year ended December 31, 2019 ($ in millions):

  

Income from continuing operations before tax	$155
Temporary differences (all related to operating income):
Accrued warranty expense in excess of expense included in operating income	16
Depreciation deducted on tax return in excess of depreciation expense	32
Permanent differences (all related to operating income):
Entertainment expenses (none are deductible under 2017 Tax Act)	8
Interest received on municipal bonds	3
Balance in deferred tax asset account, January 1, 2019	1
Balance in deferred tax liability account, January 1, 2019	2
The applicable enacted tax rate for all periods is 25%.

Show work.

A. Prepare the appropriate journal entry to record income taxes. Show work where possible.

B. What is Entity A's net income?

C. Sometimes a temporary difference will produce future deductible amounts. Explain what is meant by future deductible amounts. Describe at least one situation that has this effect, for example, one example is when rent revenue is collected in advance from tenants (deferred rent revenue for financial accounting purposes) but will be recognized as the tenants occupy the property. You can think of others. How are future deductible amounts recognized in the financial statements? As between deferred tax assets and deferred tax liabilities, which would management prefer and why?  

Answer 1