Deferred income taxes.
Earl Co. at the end of 2007, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:
Pretax financial income $ 750,000
Estimated expenses deductible for taxes when paid 1,200,000
Extra depreciation (1,350,000)
Taxable income $ 600,000
Estimated warranty expense of $800,000 will be deductible in 2008, $300,000 in 2009, and $100,000 in 2010. The use of the depreciable assets will result in taxable amounts of $450,000 in each of the next three years.
(a) Prepare a table of future taxable and deductible amounts.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2007, assuming an income tax rate of 40% for all years.
Income Tax Payable is based upon taxable income, while Income Tax Expense is based upon financial income. Because financial income exceeds taxable income in 2007, the company has a deferred tax liability (that is, it will owe the ...
This solution, with journal entries on an attached Excel spreadsheet, reconciles taxable and book income in one year and presents the journal entry for deferred income tax liability. It also shows how the timing differences reverse in later years.