Question

Problem 2: The following information is available for the first four years of operations for Jones Company

   Year           Earnings Before Tax

   2018           $800,000

   2019              730,000

2. On January 2, 2018, heavy equipment costing $600,000 was purchases. 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

2018       2019           2020           2021           2022 Total

$198,000   270,000       90,000           42,000           0 600,000

3. The company sells its merchandise on an installment contract basis. In 2018, Jones Co. elected, for tax purposes, to report the gross profit from the sales in the year the receivables are collected. However, for financial statement purposes, the company recognized all the gross profit ($800,000) in 2018. these procedures created a $600,000 difference between book and taxable incomes. The future collections of the installment contracts receivables are expected to result in taxable amounts of $200,000 one acc of the next three years.

4. In 2018 Jones Co. recorded $70,000 accrual for litigation liability which will be paid in 2019.

5. The enacted tax rates are 40% for 2018, 34% for the years after

Instructions

Prepare a schedule comparing depreciation for finances reporting and tax purposes for all years

Prepare a reconciliation of Book Income to Taxable Income for 2018

Prepare a schedule of future taxable and (deductible) amounts at the end of 2018

Prepare a schedule of deferred tax (asset) and liability at the end of 2018

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

Answer 1

Schedule of depreciation

Years Tax Purpose Finance Purpose Excess/Shortfall for tax purposes 2018 198000 120000 78000 2019 270000 120000 150000 2020 90000 120000 -30000 2021 42000 120000 -78000 2022 0 120000 -120000 Total Dep 600000 600000 0

Income reconciliation statement for 2018
	Income as per books			800000
Add	Depreciation as per books			120000
Less	Depreciation as per tax			198000
Less	Profit recognised on accrual basis			600000
Add	Liability recorded on accrual basis			70000
	Income for tax purpose			192000

Schedule of future taxable amounts at the end of 2018
Future collections of the installment contracts					600000
Excess depreciation claimed for tax purpose					78000
					678000

Schedule of future deductible amounts at the end of 2018
Liability to be allowed as deduction next year					70000
					70000

Deferred tax asset (DTA)
Amount of timing difference (A)				70000
Rate of tax (B)				34%
Amount of DTA [AxB]				23800

Deferred tax liability (DTL)
Amount of timing difference (A)				678000
Rate of tax (B)				34%
Amount of DTL [AxB]				230520

Net amount of DTL: 230520-23800 = 206720

Tax for 2018= 192000 x 40% = 76800

Journal Entries

Tax Expense A/c Dr. 76800

To Tax payable A/c 76800

(Being tax payable for the year 2018)

Tax Expense A/c Dr. 206,720

To Deferred Tax Laibiity A/c 206,720