In: Accounting
The following information is available for the first three years of operations for Jefferson Company:
1. Year Taxable Income
2017 $500,000
2018 375,000
2019 400,000
2. On January 2, 2017, heavy equipment costing $800,000 was purchased. The equipment had a life of 5 years and no salvage value. The straight-line method of depreciation is used for book purposes and the tax depreciation taken each year is listed below:
Tax Depreciation
2017 2018 2019 2020 Total
$264,000 $360,000 $120,000 $56,000 $800,000
3. On January 2, 2018, $360,000 was collected in advance for rental of a building for a three-year period. The entire $360,000 was reported as taxable income in 2018, but $240,000 of the $360,000 was reported as unearned revenue at December 31, 2018 for book purposes.
4. The enacted tax rates are 40% for all years.
Instructions
(a) Prepare a schedule comparing depreciation for financial reporting and tax purposes.
(b) Determine the deferred tax (asset) or liability at the end of 2017.
(c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2018.
(d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2018.
(e) Compute the net deferred tax expense (benefit) for 2018.
(f) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2018.
Prepare your solution in Excel, but be sure to label your formulas and not just input the result in the cells. Each step should be properly labeled.
year | Depreciation for financial reporting purposes (a) | Depreciation for tax purposes ( b) | Temporary difference (a - b) |
2017 | 160000 * | 264000 | ( 104000 ) |
2018 | 160000 * | 360000 | ( 200000 ) |
2019 | 160000 * | 120000 | 40000 |
2020 | 160000 * | 56000 | 104000 |
2021 | 160000 * | 0 | 160000 |
totals | 800000 | 800000 | 0 |
* $800000 / 5 |
future taxable ( deductible ) amounts : | 2018 | 2019 | 2020 | 2021 | total |
depreciation | ( 200000 ) | 40000 | 104000 | 160000 | 104000 |
deffered tax liability : $104000 * 40% = $41600 at the end of 2017. |
future taxable ( deductible ) amounts : | 2019 | 2020 | 2021 | totals |
depreciation | 40000 | 104000 | 160000 | 304000 |
rent | ( 120000 ) | ( 120000 ) | - | ( 240000 ) |
temporary differences | future taxable (deductible) amounts | tax rate | deferred tax (assets) | deferred tax (liability) |
depreciation | 304000 | 40% | 121600 | |
rent | ( 240000 ) | 40% | ( 96000 ) | |
totals | 64000 | ( 96000 ) | 121600 |
deferred tax asset at the end of 2018 | ( 96000 ) |
deferred tax asset at beginning of 2018 | 0 |
deferred tax ( benefit ) | ( 96000 ) |
deferred tax liability at the end of 2018 | 121600 |
deferred tax liability at beginning of 2018 | 41600 |
deferred tax expense | 80000 |
deferred tax ( benefit ) | ( 96000 ) |
deferred tax expense | 80000 |
net deferred tax benefit for 2018 | ( 16000 ) |
income tax expense ( $150000 - $16000 ) | $134000 | |
deferred tax asset | 96000 | |
deferred tax liability | $80000 | |
income taxes payable ( $375000 * 40% ) | 150000 |