Question

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.  

Answer 1

a)	Comparing Depreciation for Financial reporting and Tax purposes
	Equipment Cost		800,000
	Life		5	years
	Salvage Value		0
	Straight Line Depreciation		160,000	per year
	Years	Financial Reporting	Tax Purpose
	1	160,000	264,000
	2	160,000	360,000
	3	160,000	120,000
	4	160,000	56,000
	5	160,000	-
	Total Depreciation	800,000	800,000
b)	Deferred Tax Liability or asset for year ending 2017
	Taxable Income		500,000
	Let us add the depreciation deducted for Tax purpose to get the Income before depreciation
	Income before Depreciation	500,000+264,000 =	764000
	Particulars	Tax as per Book accounting	Tax as per Income Tax
	Income before Depreciation	764,000	764,000
	Depreciation	160,000	264,000
	Income after   Depreciation	604,000	500,000
	Tax Rate	40%	40%
	Tax Payable	241,600	200,000		41,600
	As the Tax payable as per Tax laws is Less compared to Book accounting , Deferred Tax Liability arises of $41,600 (241,600 - 200,000) which company will be liable to pay in future years
c)	The amount taxable for year 2018 is $375,000 assuming the tax depreciation of $360,000 is taken into account as well the advance rent received on the building.
d)	Particulars	Tax as per Book accounting	Tax as per Income Tax
	Income before Depreciation	735,000	735,000
	Less- Unearned Rent	240,000	-
	Total income	495,000	735,000
	Depreciation	160,000	360,000
	Income after   Depreciation	335,000	375,000
	Tax Rate	40%	40%
	Tax Payable	134,000	150,000		(16,000)
	As the Tax payable as per Tax laws is More compared to Book accounting , Deferred Tax Asset arises of $16,000 (150,000-134,000).
e)	Net Deferred Tax Expense/Benefit
	Deferred tax Liabilty	2017	41,600
	Deferred tax Asset	2018	16,000
	Net Deferred Tax Expense		25,600
f)	Journal Entry for 2018
	Particulars	Debit	Credit
	Income Tax Expense	150,000
	Deferred Tax Asset	16,000
	To Income Tax Payable		150,000
	To Tax expense - deferred		16,000