P198 Two Differences 2 Years Compute Taxable income and Pret

P19-8. (Two Differences, 2 Years, Compute Taxable income and Pretax Financial Income) (LO 1, 2, 4) The following information was disclosed during the audit of Elbert Inc. Year Amount Due per Tax Return 2017 $130,000 2018 104,000 2. On January 1, 2017, equipment costing $600,000 is purchased. For financial reporting purposes, the company uses straight-line depreciation over a 5-year life. For tax purposes, the company uses the elective straight-line method over a 5-year life. (Hint: For tax purposes, the half-year convention as discussed in Appendix 11A must be used.) 3. In January 2018, $225,000 is collected in advance rental of a building for a 3-year period. The entire $225,000 is reported as taxable income in 2018, but $150,000 of the $225,000 is reported as unearned revenue in 2018 for financial reporting purposes. The remaining amount of unearned revenue is to be recognized equally in 2019 and 2020. 4. The tax rate is 40% in 2017 and all subsequent periods. (Hint: To find taxable income in 2017 and 2018, the related income taxes payable amounts will have to be \"grossed up.\") 5. No temporary differences existed at the end of 2016. Elbert expects to report taxable income in each of the next 5 years. Instructions (a) Determine the amount to report for deferred income taxes at the end of 2017, and indicate how it should be classified on the balance sheet. (b) Prepare the journal entry to record income taxes for 2017. (c) Draft the income tax section of the income statement for 2017, beginning with \"Income before income taxes.\" (Hint: You must compute taxable income and then combine that with changes in cumulative temporary differences to arrive at pretax financial income.) (d) Determine the deferred income taxes at the end of 2018, and indicate how they should be classified on the balance sheet. (e) Prepare the journal entry to record income taxes for 2018. (1) Draft the income tax section of the income statement for 2018, beginning with \"Income before income taxes.\"

Solution

Since, there are multiple parts and part 1 has subparts, I have answered the first four parts.

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Part a)

The amount of deferred income taxes for 2018 is calculated as follows:

Amount of Deferred Income Taxes = Tax Rate*(Book Depreciation - Tax Depreciation)

Here, Book Depreciation = (Cost-Salvage Value)/Estimated Life = (600,000 - 0)/5 = $120,000

Tax Depreciation = Book Depreciation*6/12 = 120,000*6/12 = $60,000

Amount of Deferred Income Taxes = 40%*(120,000 - 60,000) = $24,000 (Deferred Tax Asset)

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The balance sheet presentation is given as below:

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Part b)

The journal entry is given as below:

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Notes:

The value of income tax expense is calculated as below:

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Part c)

The partial income statement is prepared below:

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Part d)

The value of deferred taxes is arrived as below:

Amount of Deferred Income Taxes = Depreciation Temporary Difference*Tax Rate + Unearned Rent Temporary Difference*Tax Rate*2 = 60,000*40% + 75,000*40%*2 = $84,000 (Deferred Tax Asset)

The classification in the balance sheet is provided as follows:

Elbert Inc.
Balance Sheet
December 31, 2017
Other Assets (Non-Current Asset)
Deferred Tax Asset	$24,000