Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 19: Question 9BE (page 1094)

Shetland Inc. had pretax financial income of \(154,000 in 2017. Included in the computation of that amount is insurance expense of \)4,000 which is not deductible for tax purposes. In addition, depreciation for tax purposes exceeds accounting depreciation by $10,000. Prepare Shetland’s journal entry to record 2017 taxes, assuming a tax rate of 45%.

Short Answer

Expert verified

Depreciation is a term used in accountswhere the value of fixed assets the organization owns decreases because of its usage. It is charged as an expense and is deductedfrom theasset's actual value.

Step by step solution

01

Computation of income tax payable and deferred tax liability

Incometaxpayable=(FinancialIncome+Insuranceexpence-Accountingdepreciation)×Taxrate=($154,000+$4,000-$10,000)×45%=$148,000×45%=$66,600

DeferredTaxliability=Accountingdepreciation×Taxrate=$10,000×45%=$4,500

02

Journal entry

Shetland Inc.

Journal Entry

Date

Particulars

Debit

Credit

2017

Income tax expense

$71,100

Income tax payable

$66,600

Deferred tax liability

$4,500

(To record the income tax expense)

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Wise Company began operations at the beginning of 2018. The following information pertains to this company. 1. Pretax financial income for 2018 is \(100,000. 2. The tax rate enacted for 2018 and future years is 40%. 3. Differences between the 2018 income statement and tax return are listed below: (a) Warranty expense accrued for financial reporting purposes amounts to \)7,000. Warranty deductions per the tax return amount to \(2,000. (b) Gross profit on construction contracts using the percentage-of-completion method per books amounts to \)92,000. Gross profit on construction contracts for tax purposes amounts to \(67,000. (c) Depreciation of property, plant, and equipment for financial reporting purposes amounts to \)60,000. Depreciation of these assets amounts to \(80,000 for the tax return. (d) A \)3,500 fine paid for violation of pollution laws was deducted in computing pretax financial income. (e) Interest revenue recognized on an investment in tax-exempt municipal bonds amounts to $1,500. 4. Taxable income is expected for the next few years. (Assume (a) is short-term in nature; assume (b) and (c) are long-term in nature.) Instructions (a) Compute taxable income for 2018. (b) Compute the deferred taxes at December 31, 2018, that relate to the temporary differences described above. Clearly label them as deferred tax asset or liability. (c) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2018. (d) Draft the income tax expense section of the income statement, beginning with “Income before income taxes.”

At December 31, 2017, Fell Corporation had a deferred tax liability of \(680,000, resulting from future taxable amounts of \)2,000,000 and an enacted tax rate of 34%. In May 2018, a new income tax act is signed into law that raises the tax rate to 40% for 2018 and future years. Prepare the journal entry for Fell to adjust the deferred tax liability.

Which of the following statements is correct with regard to IFRS and GAAP? (a) Under GAAP, all potential liabilities related to uncertain tax positions must be recognized. (b) The tax effects related to certain items are reported in equity under GAAP; under IFRS, the tax effects are charged or credited to income. (c) IFRS uses an affirmative judgment approach for deferred tax assets, whereas GAAP uses an impairment approach for deferred tax assets. (d) IFRS classifies deferred taxes based on the classification of the asset or liability to which it relates.

This year, Gumowski Company has each of the following items in its income statement. 1. Gross profits on installment sales. 2. Revenues on long-term construction contracts. 3. Estimated costs of product warranty contracts. 4. Premiums on officers’ life insurance policies with Gumowski as beneficiary. Instructions (a) Indicate where deferred income taxes are reported in the financial statements.

Rode Inc. incurred a net operating loss of \(500,000 in 2017. Combined income for 2015 and 2016 was \)350,000. The tax rate for all years is 40%. Rode elects the carryback option. Prepare the journal entries to record the benefits of the loss carryback and the loss carryforward.
See all solutions

Recommended explanations on Business Studies Textbooks

Strategic Direction

Read Explanation

Financial Performance

Read Explanation

Intermediate Accounting

Read Explanation

Business Operations

Read Explanation

Strategic Analysis

Read Explanation

Business Development

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free