Question

Taxable income and pretax financial income would be identical for Huber Co. except for its treatments of gross profit on installment sales and estimated costs of warranties. The following income computations have been prepared. Taxable Income 2016 2017 2018 Excess of revenues over expenses (excluding two temporary differences) \(160,000 \)210,000 \(90,000 Installment gross profi t collected 8,000 8,000 8,000 Expenditures for warranties (5,000) (5,000) (5,000) Taxable income \)163,000 \(213,000 \)93,000 Pretax Financial Income Excess of revenues over expenses (excluding two temporary differences) \(160,000 \)210,000 \(90,000 Installment gross profi t recognized 24,000 –0– –0– Estimated cost of warranties (15,000) –0– –0– Income before taxes \)169,000 \(210,000 \)90,000. The tax rates in effect are 2016, 40%; 2017 and 2018, 45%. All tax rates were enacted into law on January 1, 2016. No deferred income taxes existed at the beginning of 2016. Taxable income is expected in all future years. Instructions Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016, 2017, and 2018.

Short answer

Revenue and expense are two terms represented under the business venture's income statement. Both are recorded to ascertain the net income or loss of the firm.

Step-by-step solution

Working notes

For 2016

Temporary difference	Taxable amount	Tax rate	Deferred tax asset	Deferred tax liability
Installment sales	$16,000	45%		$7,200
Warranty costs	($10,000)	45%	($4,500)
Total	$6,000		($4,500)	$7,200

For 2017

Temporary difference	Taxable amount	Tax rate	Deferred tax asset	Deferred tax liability
Installment sales	$8,000	45%		$3,600
Warranty costs	($5,000)	45%	($2,250)
Total	$3,000		($2,250)	$3,600

For 2018

Temporary difference	Taxable amount	Tax rate	Deferred tax asset	Deferred tax liability
Installment sales	$8,000	45%		$3,600
Warranty costs	($5,000)	45%	($2,250)
Total	$3,000		($2,250)	$3,600

Preparation of the journal entries

Date	Particulars	Debit	Credit
2016	Income tax expense	$67,900
	Deferred tax asset	$4,500
	Income tax payable $\left(\$163,000\times 40\%\right)$		$65,200
	Deferred tax liability		$7,200
	(To record the tax expense)
2017	Income tax expense	$94,500
	Deferred tax liability	$3,600
	Income tax payable role="math" localid="1648550346127" $(\$213,000\times 45\%)$		$95,850
	Deferred tax asset		$2,250
	(To record the income tax expense for the year 2017)
2018	Income tax expense	$40,500
	Deferred tax liability	$3,600
	Income tax payable $\left(\$93,000\times 45\%\right)$		$41,850
	Deferred tax liability		$2,250
	(To record the income tax expense for the year 2018)