Problem 5 Radford Appliances computed a pretax financial los

Problem 5. Radford Appliances computed a pretax financial loss of $60,000 for the first year of its operations ended December 31, 2017. Analysis of the tax and book basis of its liabilities disclosed $80,000 in accrued warranty expenses on the books that had not been deductible from taxable income in 2017, but would be deductible in future years when the warranty expenses were paid. The future warranty payments are expected to occur in the following pattern: 2018 $14,000 36,000 18,000 12,000 $80,000 2020 2021 The enacted tax rates for this year and the next four years are as follows 2017. 2018 2019 2020 2021 Instructions 40% 35% 32% 30% 30% (1) Prepare a schedule showing the reversal of the temporary difference and the computation of income taxes payable and deferred tax assets or liabilities as of December 31, 2017. (2) Prepare journal entries to record income taxes payable and deferred income taxes. (3) Prepare the income tax expense section of the income statement for Walsh Services for 2017.

Solution

Answer 1. Years 2017 2018 2019 2020 2021 Taxable Financial Income (Loss)           (60,000.00)                            -                              -                              -                              -   Temporary Differences: Estimated Warranty Payments in Future             80,000.00                            -                              -                              -                              -   Deductible Warranty Payments                            -             (14,000.00)           (36,000.00)           (18,000.00)           (12,000.00) Taxable Income (Loss)             20,000.00           (14,000.00)           (36,000.00)           (18,000.00)           (12,000.00) Loss Carryback: 2018 Carryback ($14,000)           (14,000.00)             14,000.00 2019 Carryback ($6,000)             (6,000.00)               6,000.00 Net Taxable Amount                            -                              -             (30,000.00)           (18,000.00)           (12,000.00) Enacted Tax Rate 40% 35% 32% 30% 30% Income Tax Payable - 40% X $20,000               8,000.00 Deferred Tax Assets: Current - 40% X $14,000               5,600.00 Non-Current - 40% X $6,000               2,400.00 Answer 2. Journal Entry Date Particulars Dr. Amt. Cr. Amt 2017 1 Income Tax Expense - Current      8,000.00 Income Tax Payable    8,000.00 2 Deferred Tax Asset - Current      5,600.00 Deferred Tax Asset - Non-Current      2,400.00    Income Tax Benefit - Current    8,000.00 Answer 3. Income Statement - 2017 Loss from Continuing operations Before Income Tax           (60,000.00) Less: Income Taxes: Current Provision               8,000.00 Deferred Benefit             (8,000.00) Loss from Continuing operations           (60,000.00)