Question

The accounting records of Shinault Inc. show the following data for 2017 (its first year of operations).

1. Life insurance expense on officers was \(9,000.

2. Equipment was acquired in early January for \)300,000. Straight-line depreciation over a 5-year life is used with no salvage value. For tax purposes, Shinault used a 30% rate to calculate depreciation.

3. Interest revenue on State of New York bonds totaled \(4,000.

4. Product warranties were estimated to be \)50,000 in 2017. Actual repair and labor costs related to the warranties in 2017 were \(10,000. The remainder is estimated to be paid evenly in 2018 and 2019.

5. Gross profit on an accrual basis was \)100,000. For tax purposes, \(75,000 was recorded on the installment-sales method.

6. Fines incurred for pollution violations were \)4,200.

7. Pretax financial income was $750,000. The tax rate is 30%.

Instructions (a) Prepare a schedule starting with pretax financial income in 2017 and ending with taxable income in 2017. (b) Prepare the journal entry for 2017 to record income taxes payable, income tax expense, and deferred income taxes.

Short answer

Installment-sales method is a type of accounting recognition method where the revenue and expense of an organization is recorded only when the firm receives or pays cash.

Step-by-step solution

(a) Calculation of the pretax financial income

Particulars	Amount
Pretax financial income	$750,000
Add: Insurance expense	$9,000
Less: Bond interest revenue	$4,000
Add: Pollution fines	$4,200
Less: Depreciation expense $[\left(\frac{\$300,000}{5}\right)+\left(\$300,000\times 30\%\right)]$	$150,000
Less: Installment sales $\left(\$100,000-\$75,000\right)$	$25,000
Add: Warranty expense $\left(\$50,000-\$10,000\right)$	$40,000
Taxable income	$624,200

(b) Journal entry

Date	Particulars	Debit	Credit
2017	Income tax expense	$188,760
	Deferred tax asset$\left(\$40,000\times 30\%\right)$	$ 12,000
	Deferred tax liability $\left(\left(\$20,000\times 30\%\right)+\left(\$25,000\times 30\%\right)\right)$		$13,500
	Income tax payable$\left(\$624,200\times 30\%\right)$		$187,260
	(To record the income tax expense)