Question

The pretax financial income of Truttman Company differs from its taxable income throughout each of 4 years as follows.

Year		Pretax Financial Income		Taxable Income		Tax Rate
2020		$290,000		$180,000		35	%
2021		320,000		225,000		20	%
2022		350,000		260,000		20	%
2023		420,000		560,000		20	%

Pretax financial income for each year includes a nondeductible expense of $30,000 (never deductible for tax purposes). The remainder of the difference between pretax financial income and taxable income in each period is due to one depreciation temporary difference. No deferred income taxes existed at the beginning of 2020.

Prepare journal entries to record income taxes in all 4 years. Assume that the change in the tax rate to 20% was not enacted until the beginning of 2021. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
2020
2021
	(To record the adjustment for the decrease in the enacted tax rate.)
	(To record income taxes for 2021.)
2022
2023

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List of Accounts

  

  

Prepare the income statement for 2021, beginning with income before income taxes. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Truttman Company Income Statement (Partial)                                                                       December 31, 2021For the Year Ended December 31, 2021For the Quarter Ended December 31, 2021
AdjustmentCurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues		$
AdjustmentCurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues
AdjustmentCurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues	$
AdjustmentCurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues
AdjustmentCurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues
AdjustmentCurrentDeferredDividendsExpensesIncome before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues		$

Answer 1

Answer :

(a)

Before deferred taxes can be computed, the amount of temporary difference originating (reversing) each period and the resulting cumula-tive temporary difference at each year-end must be computed:

Because the temporary difference causes pretax financial income to exceed taxable income in the period it originates, the temporary difference will cause future taxable amounts.

Taxable income for 2020 .................................................... $180,000
Enacted tax rate for 2020.................................................... X 35%
Current tax expense for 2020 (Income taxes payable) ..... $ 63,000

2020
Income Tax Expense ............................................... 112,000
Income Taxes Payable ..................................... 63,000
Deferred Tax Liability ....................................... 49,000

The deferred taxes at the end of 2020 would be computed as follows:

*The adjustment due to the change in the tax rate is computed as follows:

Cumulative temporary difference at the end
of 2020 ............................................................................... $140,000
Newly enacted tax rate for future years .............................. X .20
Adjusted balance of deferred tax liability
at the end of 2020 ............................................................. 28,000
Current balance of deferred tax liability .............................. 49,000
Adjustment due to decrease in enacted tax rate ................ $ (21,000)

Taxable income for 2021 ....................................................... $225,000
Enacted tax rate ..................................................................... X .20
Current tax expense for 2021 (Income taxes payable) ........ $ 45,000

The deferred taxes at December 31, 2021, are computed as follows:

The deferred taxes at December 31, 2022, are computed as follows:

Deferred tax liability at the end of 2022 ................................ $77,000
Deferred tax liability at the beginning of 2022 ..................... 53,000
Deferred tax expense for 2022 (increase in
deferred tax liability) .......................................................... $24,000
Deferred tax expense for 2022 .............................................. $24,000
Current tax expense for 2022 (Income taxes payable) ........ 52,000
Income tax expense for 2022 ................................................ $76,000

The deferred taxes at December 31, 2023, are computed as follows:

(b)