Question

Kent Wesley is a junior member of the external audit team hired to audit Aldridge Inc.'s Year 2 financial statements. Kent has been tasked with reviewing differences related to Aldridge's financial statements versus its tax forms from Year 1 in order to prepare for the Year 2 audit. After reading through the workpapers gathered from the company's financial reporting group, Wesley prepares notes shown in the exhibit to discuss with his manager.

Workpaper Review—Notes                                                                               

General:
Aldridge uses U.S. GAAP and has a tax rate of 30% in Year 1. During Year 2 the tax rate was increased to 35% for Year 2 and beyond. On the liability side, it had income tax payable of $35,500 in Year 1 and an estimated $28,900 in Year 2.

Year 1:
MarLife Co. life insurance policy on Chief Operating Officer where Aldridge is sole beneficiary paid out $200,000 to Aldridge. Advance royalties received of $50,000 for anticipated sales during Year 2.

Different depreciation methods used—financial statement depreciation is straight-line, $35,000, and tax depreciation is accelerated, $52,000. Records show a $1,000 fine paid to the IRS for failure to provide required paperwork. Bad debt expense booked on receivables of $25,000.

Next Steps:
Evaluate differences to determine whether DTA or DTL is appropriate; prepare Year 1 and 2 related journal entries for comparison to Aldridge general ledger.

K. Wesley, 1/29/Year 3

1. What is the journal entry associated with the transactions above for Year 1?

a. Income tax expense

b. change in Deferred Tax Asset

c. change in Deferred Tax   Liability

D. Income tax payable

Answer 1

Journal entry for year 1

a) Income tax expense entry is

Income tax expense a/c .....Dr.

Income tax payable a/c

b) change in Deferred Tax Asset entry is

   Income tax expense a/c .....Dr.

Deferred tax asset a/c

Income tax payable a/c

c) change in Deferred Tax   Liability entry is

    Income tax expense a/c .....Dr.

Deferred tax liability a/c ......Dr.

Income tax payable a/c

d) Income tax payable entry is

Income tax a/c ......Dr.

Cash a/c