The pretax financial income of Truttman Company differs from its taxable income throughout each of 4 years as follows. Pretax Taxable Year Financial Income Income Tax Rate 2017 \(290,000 \)180,000 35% 2018 320,000 225,000 40 2019 350,000 260,000 40 2020 420,000 560,000 40

Pretax financial income for each year includes a nondeductible expense of $30,000 (never deductible for tax purposes). The remainder of the difference between pretax financial income and taxable income in each period is due to one depreciation temporary difference. No deferred income taxes existed at the beginning of 2017. Instructions (a) Prepare journal entries to record income taxes in all 4 years. Assume that the change in the tax rate to 40% was not enacted until the beginning of 2018. (b) Prepare the income statement for 2018, beginning with Income before income taxes.

Particulars

2017

2018

2019

2020

Pretax financial income

$290,000

$320,000

$350,000

$420,000

Add: Nondeductible expense

$30,000

$30,000

$30,000

$30,000

Total

$320,000

$350,000

$380,000

$450,000

Less: Taxable income

$180,000

$225,000

$260,000

$560,000

Temporary difference

$140,000

$125,000

$120,000

($110,000)

Year

Calculations

Cumulative temporary difference

2017

-

$140,000

2018

$\mathbf{\$}\mathbf{140}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{125}\mathbf{,}\mathbf{000}$

$265,000

2019

$\mathbf{\$}\mathbf{265}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{000}$

$385,000

2020

$\mathbf{\$}\mathbf{385}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{110}\mathbf{,}\mathbf{000}$

$275,000

Date

Particulars

Debit

Credit

2017

Income tax expense

$112,000

Income tax payable

$\left(\$180,000\times 35\%\right)$

$63,000

Deferred tax liability

$\left(\$140,000\times 35\%\right)$

$49,000

(To record the income tax)

2018

Income tax expense

$\left(\left(\$140,000\times 40\%\right)-\$49,000\right)$

$7,000

Deferred tax liability

$7,000

(To record the tax expense)

2018

Income tax expense

$140,000

Income tax payable

$\left(\$225,000\times 40\%\right)$

$90,000

Deferred tax liability

role="math" localid="1648532101076" $[\left(\$265,000\times 40\%\right)-\left(\$140,000\times 40\%\right)]$

$50,000

(To record the deferred tax)

2019

Income tax expense

$152,000

Income tax payable

$\left(\$260,000\times 40\%\right)$

$104,000

Deferred tax liability

$\left[\left(\$385,000\times 40\%\right)-\left(\$265,000\times 40\%\right)\right]$

$48,000

(To record the expense)

2020

Income tax expense

$180,000

Deferred tax liability

$\left[\left(\$275,000\times 40\%\right)-\left(\$385,000\times 40\%\right)\right]$

$44,000

Income tax payable

$\left(\$560,000\times 40\%\right)$

$224,000

(To record the income tax payable)

Particulars

Amount

Income before income taxes

$320,000

Less: Income tax expense

Current tax

$90,000

Deferred tax

$50,000

Adjustments made

$7,000

Net Income

$173,000