Question

During 2017, Kate Holmes Co.’s first year of operations, the company reports pretax financial income at \(250,000. Holmes’s enacted tax rate is 45% for 2017 and 40% for all later years. Holmes expects to have taxable income in each of the next 5 years. The effects on future tax returns of temporary differences existing at December 31, 2017, are summarized as follows. Future Years 2018 2019 2020 2021 2022 Total Future taxable (deductible) amounts: Installment sales \)32,000 \(32,000 \)32,000 \( 96,000 Depreciation 6,000 6,000 6,000 \)6,000 \(6,000 30,000 Unearned rent (50,000) (50,000) (100,000) Instructions (a) Complete the schedule below to compute deferred taxes at December 31, 2017. (b) Compute taxable income for 2017. (c) Prepare the journal entry to record income taxes payable, deferred taxes, and income tax expense for 2017. Future Taxable December 31, 2017 (Deductible) Tax Deferred Tax Temporary Difference Amounts Rate (Asset) Liability Installment sales \) 96,000 Depreciation 30,000 Unearned rent (100,000) Totals $

Short answer

Future taxable income is the type of income an organization assumes to earn in the future, and the relevant tax rate will be implied to pay the income tax expense.

Step-by-step solution

(a) Completion of the deferred taxes schedule

Temporary difference	Future taxable income	Tax rate	Deferred tax asset	Deferred tax liability
Installment sales	$96,000	40%		$38,400
Depreciation	$30,000	40%		$12,000
Unearned rent	($100,000)	40%	($40,000)
Total	($26,000)		($40,000)	$50,100

(b) Computation of taxable income

Particulars	Amount
Pretax financial income	$250,000
Less: Excess gross profit per books	($96,000)
Less: Excess depreciation per tax return	($30,000)
Add: Excess rental income per tax return	$100,000
Taxable income	$224,000

(c) Preparation of the journal entry

Date	Particulars	Debit	Credit
2017	Income tax expense	$111,200
	Deferred tax asset	$40,000
	Income tax payable $\left(\$224,000\times 45\%\right)$		$100,800
	Deferred tax liability		$50,400
	(To record the income tax)