Explore BrainMass

Computation of Taxable Income and Journal Entries

Problem 1
Computation of taxable income.
The records for Orkin Co. show this data for 2008:
? Gross profit on installment sales recorded on the books was $360,000. Gross profit from collections of installment receivables was $270,000.
? Life insurance on officers was $3,800.
? Machinery was acquired in January for $300,000. Straight-line depreciation over a ten-year life (no salvage value) is used. For tax purposes, MACRS depreciation is used and Orkin may deduct 14% for 2008.
? Interest received on tax exempt Iowa State bonds was $9,000.
? The estimated warranty liability related to 2008 sales was $19,600. Repair costs under warranties during 2008 were $13,600. The remainder will be incurred in 2009.
? Pretax financial income is $600,000. The tax rate is 30%.

(a) Prepare a schedule starting with pretax financial income and compute taxable income.
(b) Prepare the journal entry to record income taxes for 2008.

Problem 2
ABC Corporation began operation in 2007 and reported pretax financial income of $225,000 for the year. ABC's tax depreciation exceeded its book depreciation by $30,000. ABC's tax rate for 2007 and year thereafter is 30%.
a) In its December 31, 2007 balance sheet, what amount of deferred tax liability should be reported?
b) Prepare a schedule in good form illustrating your answer.
c) Prepare the journal entry for the expense.

Problem 3
At December 31, 2006, ABC Corporation had a deferred tax liability of $25,000. At December 31, 2007, the deferred tax liability is $42,000. The corporation's 2007 current tax expense is $43,000.
a) What amount should ABC Corporation report as total tax expense?
b) Prepare the December 31, 2007 journal entry to record income tax expense.

Solution Summary

This solution computes taxable income from numerous purchases, prepares journal entries for stated transactions and calculates the amount reported as total tax expense.