In the firstyear of operations in 2017, the pretax accounting income of LisleCompany was$16,000. Included in pretax accounting income were thefollowing:
(2) $33,000of sales revenue that will not be recognized for tax purposes untilit is collected;
(3) $32,000 in warranty expense thatwas recognized as product sales were made according to GAAP, butwill be deductible for tax purposes only when the actualdisbursements are made; and.
(1) $4,000 expense for a premium forlife insurance covering the firm’s president, with Lisle named asbeneficiary, which is not deductible for tax purposes.
The temporarydifferences are expected to reverse in the following pattern:
Installment Warranty
Year Collections Payments
2017 8,300 18,200
2018 12,800 10,300
2019 11,900 3,500
$33,000 $32,000
In addition,Lisle records $12,000 more depreciation for tax purposes than foraccounting financial statements, and it is not expected to startreversing in the near future.
The enactedtax rate for 2017 is 35%; in 2017, due to a significant change inthe tax law, the enacted tax rate for corporations became 21% for2018 and future years.
Required:
- Calculate taxable income for 2017, and prepare the journalentry necessary to record income taxes at the end of 2017. Howwould any deferred tax amounts be reported on a classified balancesheet? Show how taxable income, income tax expense, and net incomewould be reported on the income statement.
- Assume that 2018 pretax accounting income is $8,000, theinsurance premium is the same as for 2017, and Lisle records anadditional $12,000 more depreciation expense for tax purposes thanfor accounting financial statements. The portions of previousdifferences expected to reverse in 2018 do reverse exactly asestimated. Prepare the journal entry necessary to record incometaxes at the end of 2018. How would any deferred tax amounts bereported on the 2018 balance sheet? Show how taxable income, incometax expense, and net income would be reported on the 2018 incomestatement.
