Question

In: Accounting

The following information is available for the first three years of operations for Jefferson Company: 1.  ...

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.  

Solutions

Expert Solution

( a )
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
( b )
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.
( c )
future taxable ( deductible ) amounts : 2019 2020 2021 totals
depreciation 40000 104000 160000 304000
rent ( 120000 ) ( 120000 ) - ( 240000 )
( d )
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
( e )
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 )
( f )
income tax expense ( $150000 - $16000 ) $134000
deferred tax asset 96000
     deferred tax liability $80000
     income taxes payable ( $375000 * 40% ) 150000

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