Question

P19.3 (LO 1, 2, 4) (Second Year of Depreciation Difference, Two Differences, Single Rate, ­Discontinued Operation) The following information has been obtained for Gocker Corporation.

1.    Prior to 2020, taxable income and pretax financial income were identical.

2.    Pretax financial income is $1,700,000 in 2020 and $1,400,000 in 2021

. 3.    On January 1, 2020, equipment costing $1,200,000 is purchased. It is to be depreciated on a straight-line basis over 5 years for tax purposes and over 8 years for financial reporting purposes. (Hint: Use the half-year convention for tax purposes, as discussed in Appendix 11A.)

4.    Interest of $60,000 was earned on tax-exempt municipal obligations in 2021.

5.    Included in 2021 pretax financial income is a gain on discontinued operations of $200,000, which is fully taxable.

6.    The tax rate is 20% for all periods.

7.    Taxable income is expected in all future years.

Instructions

a.    Compute taxable income and income taxes payable for 2021.

b.    Prepare the journal entry to record 2021 income tax expense, income taxes payable, and deferred taxes.

c.    Prepare the bottom portion of Gocker's 2021 income statement, beginning with “Income from continuing operations before income taxes.”

d.    Indicate how deferred income taxes should be presented on the December 31, 2021, balance sheet.

Answer 1

a) Computation of Taxable Income and Income Tax for 2021
	$
Financial Income	14,00,000
Add: Depreciation as per Financial Reporting	1,50,000
Less: Depreciation as per Tax	-2,40,000
Less: Tax free Interest Income	-60,000
Taxable Income	12,50,000
Income Tax Payable @ 20%	2,50,000
Note:
1) It is assumed pretax financial income of $ 14,00,000 is after depreciation.
2) Depreciation as per financial Reporting every year (1200000/8)= $ 1,50,000
3) Depreciation as per Tax every year (1200000/5)= $ 2,40,000
4) Depreciation as per Tax for 1st year (240000/2)= $ 1,20,000 using half year convention
5) It is assumed as normally financial income include all income so exempted interst income
shall be rdeduct to reach at taxable income.
6) Income from discontinuing operation is taxable. So it's adjustment does not required.
b)
Deferred Tax Calculation
Depreciation for 2020 :	$
As per Financial Reporting	1,50,000
As per Tax	1,20,000
Deferred Depreciation of Financial Reporting	30,000
Deferred Tax Assets as on 31.12.2020 @ 20%	6,000
Depreciation for 2021 :
As per Financial Reporting	1,50,000
As per Tax	2,40,000
Deferred Depreciation of Tax	-90,000
Deferred Tax Liability for 2021 @ 20%	-18,000
Deferred Tax Assets as on 31.12.2020	6,000
Deferred Tax Liability as on 31.12.2021	-12,000
Journal Entry during 2021	$	$
Income Tax Expense A/c ………………………Dr	2,50,000
Income Tax Payable A/c		2,50,000
Deferred Tax Expenses A/c …………….……Dr	18,000
Deferred Tax Liability A/c		18,000
c) Income Statement for 2021
		$
Income from continuing operation before tax		12,00,000
Tax Expenses		2,40,000
Income from continuing operation after tax	(A)	9,60,000
Income from Discontinuing operation before tax		2,00,000
Tax Expenses		40,000
Income from Discontinuing operation after tax	(B)	1,60,000
Income from Contunuing and Discontinuing operation before tax		14,00,000
Tax Expenses		2,80,000
Income from Discontinuing operation after tax	(C=A+B)	11,20,000	-
d) Deferred Tax Balance as on 31.12.2021
Under Liability of Balance Sheet
Under head of " Non Current Liability"
Deferred Tax Liability		$ 12,000