Question

Problem 5. Radford Appliances computed a pretax financial loss of $60,000 for the first year of its operations ended December 31. 2017. Analysis of the tax and book basis of its liabilities disclosed S80.000 in accrued warranty expenses on the books that had not been deductible from taxable income in 2017, but would be deductible in future years when the warranty expenses were paid. The future warranty payments are expected to occur in the following pattern 2018............... ... S14,000 2019.............. 36,000 2020 ........ 18,000 2021 .... 12,000 $80,000 The enacted tax rates for this year and the next four years are as follows: 2017 .... 40% 2018. 35% 2019 ............. 32% 30% 2021 30% Instructions (1) Prepare a schedule showing the reversal of the temporary difference and the computation of income taxes payable and deferred tax assets or liabilities as of December 31, 2017 (2) Prepare journal entries to record income taxes payable and deferred income taxes. (3) Prepare the income tax expense section of the income statement for Walsh Services for 2017 2020 .....

Answer 1

           

	Reversal years
	2017	2018	2019	2020	2021
Taxable financial income	(60000)	0	0	0	0
Temporary differences:
Estimated warranty payments in future years	80000
Deductible amounts – warranty payments		(14000)	(36000)	(18000)	(12000)
Taxable income (loss)	20000	(14000)	(36000)	(18000)	(12000)
Loss carry back:
2018 carryback	(14000)	14000
2019 carryback	(6000)		6000
Net taxable (deductible amount)	0	0	(30000)	(18000)	(12000)
Enacted tax rate	40%	35%	32%	30%	30%
Income taxes payable (40% x $20,000)	8000
Deferred tax asset:
Current (40% x $14,000)	5600
Noncurrent (40% x $6,000)	2400

Part 2

No.	General journal	Debit	Credit
1	Income Tax Expense -Current	8000
	Income Taxes Payable		8000
2	Deferred Tax Asset-Current	5600
	Deferred Tax Asset-Noncurrent	2400
	Income Tax Benefit-Deferred		8000

Part 3

2017 Income Statement Presentation:

Loss from continuing operations before income taxes		(60000)
Less income taxes:
Current provision	8000
Deferred benefit	(8000)	0
Loss from continuing operations		$(60000)