Question

Geyser Company began operations in 2017 and has provided the following information.

1. Pretax financial income for 2017 is $200,000.
2. The tax rate enacted for 2017 and future years is 40%.
3. Differences between the 2017 income statement and tax return are listed below:
   1. Warranty expense accrued for financial reporting purposes amounts to $10,000. Warranty deductions per the tax return amount to $4,000.
   2. Gross profit on construction contracts using the percentage-of-completion method for book purposes amounts to $184,000. Gross profit on construction contracts for tax purposes amounts to $124,000.
   3. Depreciation of property, plant, and equipment for financial reporting purposes amounts to $60,000. Depreciation of these assets amounts to $80,000 for the tax return.
   4. A $3,500 fine paid for violation of pollution laws was deducted in computing pretax financial income.
   5. Interest revenue earned on an investment in tax-exempt municipal bonds amounts to $1,400.
4. Taxable income is expected for the next few years.

Provided with this assignment is the Excel workbook containing the spreadsheets you will need for this exercise.

Use the spreadsheet Journal Entries to prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2017.

Draft the income tax expense section of the income statement, beginning with “Income before income taxes”.

Answer 1

Solution:

Computation of Taxable Income - Geyser company
For year ended 2017
Particulars	Amount
Pretax financial income	$200,000.00
Permanent differences:
Interest revenue on Muncipal bonds	-$1,400.00
Fines for pollution violation	$3,500.00
Temporary differences:
Extra depreciation for tax over book depreication [$80,000 - $60,000]	-$20,000.00
Excess warrant expense in books over warrant deduction as per return ($10,000 - $4,000)	$6,000.00
Excess gross profit in books on accrual basis over gross profit as per Tax return ($184,000 - $124,000)	-$60,000.00
Taxable Income	$128,100.00

Journal Entries - Geyser Company
Date	Particulars	Debit	Credit
31-Dec-17	Income tax expense Dr	$80,840.00
	Deferred tax assets Dr ($6,000*40%)	$2,400.00
	To Income taxes payable ($128,100*40%)		$51,240.00
	To Deferred tax liability ($80,000*40%)		$32,000.00
	(To record income tax and deferred tax for the year)

Geyser Company
Income tax expense section of Income Statement - 2017
Particulars		Amount
Income before Tax		$200,000.00
Income Tax Expense:
Current	$51,240.00
Deferred tax Liability	$32,000.00
Deferred tax Assets	-$2,400.00	$80,840.00
Net Income		$119,160.00