P19-2 (One Temporary Difference, Tracked for 4 Years, One Permanent Difference, Change in Rate)
The pretax financial income of Parker-Gregory Company differs from its taxable income throughout each of 4 years as follows.
Year Pretax Financial Income Taxable Income Tax Rate
2007 $280,000 $180,000 35%
2008 320,000 225,000 40%
2009 350,000 270,000 40%
2010 420,000 580,000 40%
Pretax financial income for each year includes a nondeductible expense of $30,000 (never deductible for tax purposes). The remainder of the difference between pretax financial income and taxable income in each period is due to one depreciation temporary difference. No deferred income taxes existed at the beginning of 2007.
(a) Prepare journal entries to record income taxes in all 4 years. Assume that the change in the tax rate to 40% was not enacted until the beginning of 2008.
(b) Prepare the income statement for 2008, beginning with income before income taxes.
This solution shows the journal entries associated with the questions presented.
Journal Entry to Record Income Tax
(Two Temporary Differences, One Rate, Beginning Deferred Taxes) The following facts
related to Krung The Corporation.
1) Deferred tax liability, January 1, 2007, $40,000
2) Deferred tax asset, January 1, 2007, $0
3) Taxable income for 2007, $95,000
4) Pretax financial income for 2007, $200,000
5) Cumulative temporary difference at December 31, 2007, giving rise to future taxable
6) Cumulative temporary difference at Dec 31, 2007, giving rise to future deductible'
7) Tax rate for all years 40%
8) The company is expected to operate profitable in the future.
a) Compute income tax payable
b) Prepare journal entry to record income tax expense deferred income taxes
income taxes, and income taxes payable for 2007
c) Prepare the income tax expense section of the income statement for 2007,
beginning with the line "Income before income taxes."