Question

In: Accounting

Waterway Services Ltd. follows ASPE and had earned accounting income before taxes of $518,000 for the...

Waterway Services Ltd. follows ASPE and had earned accounting income before taxes of $518,000 for the year ended December 31, 2020.

During 2020, Waterway paid $80,000 for meals and entertainment expenses.

In 2017, Waterway’s tax accountant made a mistake when preparing the company’s income tax return. In 2020, Waterway paid $9,700 in penalties related to this error. These penalties were not deductible for tax purposes.

Waterway owned a warehouse building for which it had no current use, so the company chose to use the building as a rental property. At the beginning of 2020, Waterway rented the building to Trung Inc. for two years at $56,000 per year. Trung paid the entire two years’ rent in advance.

Waterway used the straight-line depreciation method for accounting purposes and recorded depreciation expense of $311,600. For tax purposes, Waterway claimed the maximum capital cost allowance of $465,300. This asset had been purchased at the beginning of the year for $3,069,000.

In 2020, Waterway began selling its products with a two-year warranty against manufacturing defects. In 2020, Waterway accrued $294,000 of warranty expenses: actual expenditures for 2020 were $90,600 with the remaining $203,400 anticipated in 2021.

In 2020, Waterway was subject to a 25% income tax rate. During the year, the federal government announced that tax rates would be decreased to 23% for all future years beginning January 1, 2021.

Prepare the journal entries to record current and future income taxes for 2020

Solutions

Expert Solution

Summary Calculation
Calculation 2020 2021
Amount $ Amount $
Income before taxes for the year ended 31-Dec-2020 518,000.00 -
Add: Penalties related to 2017 9,700.00 -
Less: Building Rental from Trung 56000/2 -28,000.00 28,000.00
Add: Warranty Expense not related to the CY 294,000 - 90600 203,400.00 -203,400.00
Net income before tax for the year 2020 703,100.00 -175,400.00
Tax Payable @ 25% for the year 2020 175,775.00 -43,850.00
Journal Entries for Tax Calculation Purpose
SL Particulars Group Debit $ Credit $ Effect Income Bal
1 Capital Ac Capital 9,700.00
ITR Penalties Expense Ac Indirect Expense 9,700.00 Add 527,700.00
(Being Income Tax Return penalties not allowable as expenditure. Hence added back to Income) (518,000+9700)
2 Building Rental Ac Income 28,000.00
Advance Building Received Acc Current Liabilities 28,000.00 Deduct 499,700.00
(Being Advance rental received transferred from Current year to Previous Year)
3 Warranty expence paid in Advance Ac Current Asset 203,400.00
Warranty expence Ac Indirect Expense 203,400.00 Add 703,100.00
(Being Warranty Expences not related to current year transferred to Prepaid Account )
4 Income Tax Ac Indirect Expense 175,775.00
Bank/Cash Current Asset 175,775.00 Deduct 527,325.00
(Being Income Tax Expense paid for the year 2020)
** Meals & Entertainment expences allowed as deduction from Income.
** The CCA is allowable when purchases are anticipated to last for years, such as equipment and machinery. Businesses can claim from zero to the maximum amount of CCA in any given year, and carry over any amount less than the maximum to claim for the next year

Related Solutions

katie had a before-tax income of $40,000 and paid taxes of $6,000. Ramesh had a before...
katie had a before-tax income of $40,000 and paid taxes of $6,000. Ramesh had a before tax income of $35,000 and paid taxes of $5,250. Based on this information, the tax system is ..... a.regressive for all income levels below $40,000 b. proportional c. progressive d. based on the benefits-received principle e. regressive for income levels between $35,000 and $40,000
The U.S. a.income taxes U.S.corporate income earned abroad as though the income was earned in the...
The U.S. a.income taxes U.S.corporate income earned abroad as though the income was earned in the U.S., ignoring foreign income tax paid. b.tries to limit double taxation on U.S. corporate income earned abroad. c.allows a deduction, not a credit, to U.S. corporations for tax paid to foreign countries. d.taxes U.S. corporate income earned abroad at rates lower than the host country.
Additional Problem 12 Sheridan Ltd., which follows ASPE, had the following comparative statement of financial position:...
Additional Problem 12 Sheridan Ltd., which follows ASPE, had the following comparative statement of financial position: Sheridan Ltd. Comparative Statement of Financial Position As at December 31 Assets 2018 2017 Cash $ 70,520 $ 43,000 Accounts receivable 116,960 87,720 Inventories 68,800 103,200 Prepaid insurance 8,600 6,880 Equipment 264,880 223,600 Accumulated depreciation-equipment (60,200 ) (43,000 ) Patents 68,800 86,000 Total assets $ 538,360 $ 507,400 Liabilities and Shareholders’ Equity Accounts payable $ 79,120 $ 68,800 Interest payable 6,880 10,320 Wages payable...
Additional Problem 12 Sheridan Ltd., which follows ASPE, had the following comparative statement of financial position:...
Additional Problem 12 Sheridan Ltd., which follows ASPE, had the following comparative statement of financial position: Sheridan Ltd. Comparative Statement of Financial Position As at December 31 Assets 2018 2017 Cash $ 70,520 $ 43,000 Accounts receivable 116,960 87,720 Inventories 68,800 103,200 Prepaid insurance 8,600 6,880 Equipment 264,880 223,600 Accumulated depreciation-equipment (60,200 ) (43,000 ) Patents 68,800 86,000 Total assets $ 538,360 $ 507,400 Liabilities and Shareholders’ Equity Accounts payable $ 79,120 $ 68,800 Interest payable 6,880 10,320 Wages payable...
For the year ended December 31, 2020, Stellar Ltd. reported income before income taxes of $100,000....
For the year ended December 31, 2020, Stellar Ltd. reported income before income taxes of $100,000. In 2020, Stellar Ltd. paid $54,000 for rent; of this amount, $18,000 was expensed in 2020. The remaining $36,000 was treated as a prepaid expense for accounting purposes and would be expensed equally over the 2021-2022 period. The full $54,000 was deductible for tax purposes in 2020. The company paid $70,000 in 2020 for membership in a local golf club (which was not deductible...
Luxley Corporation has $150,000 of income before taxes in its 2020 accounting records. In computing income...
Luxley Corporation has $150,000 of income before taxes in its 2020 accounting records. In computing income tax expense, Luxley makes the following                                           observations of differences between the accounting records and the tax return:                                                                                      1.     An accelerated depreciation method is used for tax purposes. In 2020, Luxley reports $12,000 more depreciation...
In 2017, XYZ Corporation has $75,000 of income before taxes in its accounting records.   In computing income...
In 2017, XYZ Corporation has $75,000 of income before taxes in its accounting records.   In computing income tax expense, XYZ makes the following observations of differences between the accounting records and the tax return: An accelerated depreciation method is used for tax purposes.  In 2017, XYZ reports $6,000 more depreciation expense for tax purposes than it shows in the accounting records. In 2017, XYZ collected $60,000 from a business that is renting a portion of its warehouse.  The $60,000 covers the rental payment...
No Growth Incorporated had operating income before interest and taxes in 2011 of $250 million. The...
No Growth Incorporated had operating income before interest and taxes in 2011 of $250 million. The firm was expected to generate this level of operating income indefinitely. The firm had depreciation expense of $12 million that same year. Capital spending totaled $15 million during 2011. At the end of 2010 and 2011, working capital totaled $60 and $70 million, respectively. The firm’s combined marginal state, local, and federal tax rate was 40% and its debt outstanding had a market value...
Government imposes direct taxes on the income earned and generated by businesses. Are these taxes burden...
Government imposes direct taxes on the income earned and generated by businesses. Are these taxes burden on the public or these taxes are an instrument of social and economic policy in the hands on government. Express your opinion with suitable examples.
Leah earned $88,000 in taxable income in 2018 and paid $19,360 in taxes. Leah earned $89,910 in taxable income in 2019 and paid $19,837.50 in taxes.
Leah earned $88,000 in taxable income in 2018 and paid $19,360 in taxes. Leah earned $89,910 in taxable income in 2019 and paid $19,837.50 in taxes. What is Leah’s 2019 marginal tax rate?23%25%34%22%
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT