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Computation of Taxable Income and Journal Entries

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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.

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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.

See Also This Related BrainMass Solution

Income taxes journal entries

1- ABC. started business in January 2013, and purchased a machine for $100,000 (four-year expected useful life with no salvage value). ABC uses straight line depreciation for financial reporting purposes. For tax purposes, the deduction is 50% of cost in 2013, 30% in 2014 and 20% in 2015. Pretax accounting income for 2013 was $600,000, which includes interest revenue of $50,000 from municipal bonds. The enacted tax rate is 40%. There are no other differences between accounting income and taxable income. Make the journal entry to record income taxes in 2013 ?


A -At the end of 2012, B Co. had a deferred tax asset account with a balance of $160 million attributable to a temporary book-tax difference of $400 million in a liability for estimated expenses. At the end of 2013, the temporary difference is $240 million. There were no other temporary differences. Taxable income for 2013 is $800 million and the tax rate is 40%. B Co has a valuation allowance of $40 million for the deferred tax asset at the beginning of 2013. Make the journal entry(s) to record income taxes for 2013 assuming it is "more likely than not" that the deferred tax asset will be realized ?

B - Assume the same facts as above . Make the journal entry(s) to record B Co income taxes for 2013 assuming it is "more likely than not" that one-half of the deferred tax asset will not ultimately be realized.

3-Z Corp. began operations in 2010. In 2013, it reported a pretax operating loss of $700,000 for financial reporting purposes. Contributing to the loss were (a) a tax reporting penalty of $60,000 assessed by the Internal Revenue Service and paid in 2013 and (b) an estimated loss of $80,000 from accruing a loss contingency. The loss will be tax deductible when paid in 2014. The enacted tax rate is 40% in 2013 and future years. There were no other permanent or temporary differences other than those listed above. Z Corp taxable income and enacted tax rates in its first three years were:
2010 275,000 Tax rate 38%
2011 200,000 Tax rate 35%
2012 150,000 Tax rate 38%

1. Make the journal entry to record taxes in 2013 assuming Z Corp elects the carryback option.
2. Show the lower portion of the 2013 income statement that reports the income tax benefit of the operating loss.
3. Make the journal entry to record income taxes in 2014 assuming pretax accounting income is $300,000.

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