The following information is available for Remmers Corporation for 2017. 1. Depreciation reported on the tax return exceeded depreciation reported on the income statement by \(120,000. This difference will reverse in equal amounts of \)30,000 over the years 2018–2021. 2. Interest received on municipal bonds was \(10,000. 3. Rent collected in advance on January 1, 2017, totaled \)60,000 for a 3-year period. Of this amount, \(40,000 was reported as unearned at December 31, 2017, for book purposes. 4. The tax rates are 40% for 2017 and 35% for 2018 and subsequent years. 5. Income taxes of \)320,000 are due per the tax return for 2017. 6. No deferred taxes existed at the beginning of 2017. Instructions (a) Compute taxable income for 2017. (b) Compute pretax financial income for 2017. (c) Prepare the journal entries to record income tax expense, deferred income taxes, and income taxes payable for 2017 and 2018. Assume taxable income was $980,000 in 2018. (d) Prepare the income tax expense section of the income statement for 2017, beginning with “Income before income taxes.”

Step by step solution

01

(a) Computation of taxable income

$\begin{array}{rcl}\mathbf{Taxable}\mathbf{}\mathbf{Income}& \mathbf{=}& \frac{\mathbf{Income}\mathbf{}\mathbf{tax}\mathbf{}\mathbf{due}}{\mathbf{Tax}\mathbf{}\mathbf{rate}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{320}\mathbf{,}\mathbf{000}}{\mathbf{40}\mathbf{\%}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{800}\mathbf{,}\mathbf{000}\end{array}$

02

(b) Computation of pretax financial income

$\begin{array}{rcl}\mathbf{Pretax}\mathbf{}\mathbf{financial}\mathbf{}\mathbf{income}& \mathbf{=}& \mathbf{Taxable}\mathbf{}\mathbf{income}\mathbf{+}\mathbf{Excess}\mathbf{}\mathbf{depreciation}\mathbf{+}\mathbf{Municipal}\mathbf{}\mathbf{interest}\mathbf{-}\mathbf{Unearned}\mathbf{}\mathbf{rent}\\ & \mathbf{=}& \mathbf{\$}\mathbf{800}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{40}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{890}\mathbf{,}\mathbf{000}\end{array}$

03

(c) Journal entry

Date	Particulars	Debit	Credit
2017	Income tax expense	$348,000
	Deferred tax asset $\left(\$40,000\times 35\%\right)$	$14,000
	Income tax payable $\left(\$800,000\times 40\%\right)$		$320,000
	Deferred tax liability $\left(\$120,000\times 35\%\right)$$\left(\$120,000\times 35\%\right)$		$42,000
	(To record the tax)
2018	Income tax expense	$164,500
	Deferred tax liability$\left(\frac{\$120,000}{4}\times 35\%\right)$	$10,500
	Income tax payable $\left(\left(\$120,000\times 4\right)\times 35\%\right)$		$168,000
	Deferred tax asset $\left(\frac{\$40,000}{2}\times 35\%\right)$		$7,000
	(To record the tax)

04

(d) Financial statement

Remmers Corporation
Income Statement
Particulars	Amount
Income before income taxes	$890,000
Less: Income tax expense
Current	$320,000
Deferred $\left(\$42,000-\$14,000\right)$	$28,000
Net income	$542,000

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