The following information has been obtained for Gocker Corporation.

1. Prior to 2017, taxable income and pretax financial income were identical.

2. Pretax financial income is \(1,700,000 in 2017 and \)1,400,000 in 2018.

3. On January 1, 2017, equipment costing \(1,200,000 is purchased. It is to be depreciated on a straight-line basis over 5 years for tax purposes and over 8 years for financial reporting purposes. (Hint: Use the half-year convention for tax purposes, as discussed in Appendix 11A.)

4. Interest of \)60,000 was earned on tax-exempt municipal obligations in 2018.

5. Included in 2018 pretax financial income is a gain on discontinued operations of $200,000, which is fully taxable.

6. The tax rate is 35% for all periods.

7. Taxable income is expected in all future years.

Instructions (a) Compute taxable income and income taxes payable for 2018. (b) Prepare the journal entry to record 2018 income tax expense, income taxes payable, and deferred taxes. (c) Prepare the bottom portion of Gocker’s 2018 income statement, beginning with “Income from continuing operations before income taxes.” (d) Indicate how deferred income taxes should be presented on the December 31, 2018, balance sheet.

Step by step solution

01

Working notes

Year	Book depreciation	Tax depreciation	Difference	Cumulative difference	After tax @35%
2017	$150,000	$120,000 $\left(\frac{\$1,200,000}{5}\times 0.5\right)$	$30,000	$30,000	$10,500
2018	$150,000	$240,000	-$90,000	-$60,000	-$21,000
2019	$150,000	$240,000	-$90,000	$150,000	-$52,500
2020	$150,000	$240,000	-$90,000	-$240,000	-$84,000
2021	$150,000	$240,000	-$90,000	-$330,000	-$115,500
2022	$150,000	$120,000	$30,000	-$300,000	-$105,000
2023	$150,000		$150,000	-$150,000	-$52,500
2024	$150,000		$150,000
Total	$1,200,000	$1,200,000

02

(a) Computation of the taxable income and taxes payable

Particulars	Amount
Pretax financial income	$1,400,000
Less: Nontaxable interest	$60,000
Less: Excess depreciation	$90,000
Taxable income for 2018	$1,250,000
Multiply: Tax rate	35%
Income tax payable	$437,500

03

(b) Journal entry

Date	Particulars	Debit	Credit
2018	Income tax expense	$469,000
	Income tax payable		$437,500
	Deferred tax liability		$21,000
	Deferred tax asset $\left(\$30,000\times 35\%\right)$		$10,500
	(To record the tax expense)

04

(c) Preparation of the income statement

Income Statement
Particulars		Amount
Income before income taxes and extraordinary item		$1,200,000
Less: Income tax expense
Current $\left(\$437,000-\left(\$200,000\times 35\%\right)\right)$	$367,500
Deferred	$31,500	$399,000
Income before extraordinary item		801,000
Add: Extraordinary gain	$200,000
Less: Income tax	$70,000	$130,000
Net Income		$931,000

05

(d) Indication of the amounts

The deferred tax liability of $17,500 will be reported under the liabilities section under the head long-term liabilities.

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