Question

The information that follows pertains to Esther Food Products: a. At December 31, 2018, temporary differences were associated with the following future taxable (deductible) amounts: Depreciation Prepaid expenses Warranty expenses $ 58,000 25,000 (7,000) b. No temporary differences existed at the beginning of 2018. C. Pretax accounting income was $98,000 and taxable income was $22,000 for the year ended December 31, 2018. d. The tax rate is 40%. Required: Complete the following table given below and prepare the appropriate journal entry to record income taxes for 2018.

Answer 1

Solution:

Particulars	Amount	Rate of Tax	Tax	Recorded as
Pretax accounting income	$98,000.00
Permanent difference:
No permanent differences	$0.00
Income subject to taxation	$98,000.00	40%	$39,200.00	Income tax expense
Temporary differences:
Depreciation	-$58,000.00	40%	-$23,200.00	Deferred tax liability
Prepaid Expenses	-$25,000.00	40%	-$10,000.00	Deferred tax liability
Warranty Expense	$7,000.00	40%	$2,800.00	Deferred tax assets
Income taxable in current year	$22,000.00	40%	$8,800.00	Income Tax Payable

Journal Entries
Date	Particulars	Debit	Credit
31-Dec-18	Income tax expense Dr	$39,200.00
	Deferred tax assets Dr	$2,800.00
	To Income taxes payable		$8,800.00
	To Deferred tax liability		$33,200.00
	(To record income tax expense)