Question

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Problem 1:

The information is available for the first year of operations for Medeiros, Inc.

The following differences enter into the reconciliation of financial income and taxable income of Medeiros, Inc. for the year ended December 31, 2018, its first year of operations. The enacted income tax rate is 40% for all years

a) The company has chosen to depreciate all of its fixed assets on an accelerated basis for tax purposes but on a straight-line basis for accounting purposes. The excess tax depreciation over book depreciation is 240,000 and will reverse equally over a four-year period, 2019-2022.

b) In 2018 the company incurred a lawsuit which is probable and estimated at $120,000. It has been properly recorded as a litigation liability at 12/31/18 and will be paid in 2019.

c) On October 1, 2018 the company received a rental income payment of $120,000 which covers 24 months. The unearned rent revenue has been properly recorded on the books and the full amount appropriately recognized in taxable income for the year ending December 31, 2018.

d) The company will receive interest revenue from the New York bonds of $21,000 each year until their maturity at the end of 2024

e) In 2018, Medeiros insured the lives of its chief executives. The premiums paid amount to $45,000 and this amount was shown as an expense on the income statement.

f) Pretax accounting income was $950,000 in 2018.

Instructions

Prepare a reconciliation of Pretax accounting income to Taxable Income

2) Prepare a schedule of future taxable and (deductible amounts)

3) Prepare a schedule of the deferred tax (asset) and liability

4) Prepare the journal entry to record income tax expense, deferred taxes, and the income        taxes payable for 2018

Answer 1

1	Reconciliation of Pretax accounting income to taxable income
	Pretax accounting income for 2018	$950,000
	Less: Depreciation	$240,000
	Less: Tax-exempted interest on NY bonds	$21,000
	Add: Litigation liability	$120,000
	Add: Insurance premium on lives of its chief executives	$45,000
	Taxable Income	$854,000
2	Schedule of future taxable and deductible amounts
	Future taxable
	Depreciation	$240,000
	Deductible amount
	Legal expenses (litigation liability)	$120,000
3	Schedule of deferred tax asset and liability
	Deferred tax asset
	Litigation liability (120000 x 40%)	$48,000
	Deferred tax liability
	Depreciation (240000 x 40%)	$96,000
4	Journal entry to record income tax expenses, deferred taxes and income tax payable
	Income tax expenses	$389,600
	Deferred tax asset	$48,000
	Deferred tax liability		$96,000
	Income tax payable		$341,600
	Income tax expenses = (Accounting income - permanent difference)x40%
	= (950000-21000+45000) x 40% = $389600
	Income tax payable = Taxable income x 40%
	=854000 x 40% = $341600