Question

The pretax financial income of Truttman Company differs from its taxable income throughout each of 4 years as follows. Pretax Taxable Year Financial Income Income Tax Rate 2017 \(290,000 \)180,000 35% 2018 320,000 225,000 40 2019 350,000 260,000 40 2020 420,000 560,000 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 2017. Instructions (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 2018. (b) Prepare the income statement for 2018, beginning with Income before income taxes.

Short answer

Depreciation is a term used for fixed assetsof an organization. A depreciation accountis maintained for each depreciating assetto evaluate the opening and closing balanceof the asset in each year.

Step-by-step solution

Working notes to calculate the cumulative temporary difference

Particulars	2017	2018	2019	2020
Pretax financial income	$290,000	$320,000	$350,000	$420,000
Add: Nondeductible expense	$30,000	$30,000	$30,000	$30,000
Total	$320,000	$350,000	$380,000	$450,000
Less: Taxable income	$180,000	$225,000	$260,000	$560,000
Temporary difference	$140,000	$125,000	$120,000	($110,000)

Year	Calculations	Cumulative temporary difference
2017	-	$140,000
2018	$\mathbf{\$}\mathbf{140}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{125}\mathbf{,}\mathbf{000}$	$265,000
2019	$\mathbf{\$}\mathbf{265}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{000}$	$385,000
2020	$\mathbf{\$}\mathbf{385}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{110}\mathbf{,}\mathbf{000}$	$275,000

(a) Journal entries

Date	Particulars	Debit	Credit
2017	Income tax expense	$112,000
	Income tax payable $\left(\$180,000\times 35\%\right)$		$63,000
	Deferred tax liability $\left(\$140,000\times 35\%\right)$		$49,000
	(To record the income tax)
2018	Income tax expense $\left(\left(\$140,000\times 40\%\right)-\$49,000\right)$	$7,000
	Deferred tax liability		$7,000
	(To record the tax expense)
2018	Income tax expense	$140,000
	Income tax payable $\left(\$225,000\times 40\%\right)$		$90,000
	Deferred tax liability role="math" localid="1648532101076" $[\left(\$265,000\times 40\%\right)-\left(\$140,000\times 40\%\right)]$		$50,000
	(To record the deferred tax)
2019	Income tax expense	$152,000
	Income tax payable $\left(\$260,000\times 40\%\right)$		$104,000
	Deferred tax liability $\left[\left(\$385,000\times 40\%\right)-\left(\$265,000\times 40\%\right)\right]$		$48,000
	(To record the expense)
2020	Income tax expense	$180,000
	Deferred tax liability $\left[\left(\$275,000\times 40\%\right)-\left(\$385,000\times 40\%\right)\right]$	$44,000
	Income tax payable $\left(\$560,000\times 40\%\right)$		$224,000
	(To record the income tax payable)

(b) Income Statement

Truttman Company
Income Statement
Particulars	Amount
Income before income taxes	$320,000
Less: Income tax expense
Current tax	$90,000
Deferred tax	$50,000
Adjustments made	$7,000
Net Income	$173,000