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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Multiple Temporary Differences Wilcox Company has prepared the following reconciliation of its pretax financial income with its taxable income for 2019:

Chapter 18, Problem 3P, Multiple Temporary Differences Wilcox Company has prepared the following reconciliation of its

At the beginning of 2019, Wilcox had a deferred tax liability of $495. The current tax rate is 30%, and no change in the tax rate has been enacted for future years. At the end of 2019, Wilcox anticipates that actual warranty costs will exceed estimated warranty expense by $100 next year and that financial depreciation will exceed tax depreciation by $1,800 in future years. Wilcox has earned income in all past years and expects to earn income in the future.

Required:

  1. 1. Prepare Wilcox’s income tax journal entry at the end of 2019.
  2. 2. Prepare the lower portion of Wilcox’s 2019 income statement.
  3. 3. Show how the income tax items are reported on Wilcox’s December 31, 2019, balance sheet.

1.

To determine

Prepare journal to record the entry for income tax of Company W at the end of 2019.

Explanation

Temporary Difference: Temporary difference refers to the difference of one income recognized by the tax rules and accounting rules of a company in different periods. Consequently the difference between the amount of assets and liabilities reported in the financial reports and the amount of assets and liabilities as per the company’s tax records is known as temporary difference.

Prepare journal to record the entry for income tax of Company W at the end of 2019:

DateAccount title and ExplanationPost ref. Amount
DebitCredit
2019    
December 31 Income tax expense (balancing figure) $900 
 Deferred tax asset-Warranty expense (1) $30 
     Income tax payable (2)  $885
  Deferred tax liability (3)  $45
 (To record the income tax payable)   

Table (1)

  • Income tax expense is an expense that decreases the stockholder’s equity and it is increased. Thus, it is debited.
  • Deferred tax asset-Warranty expense is an expense that decreases the stockholder’s equity and it is increased. Thus, it is debited.
  • Income tax payable is a liability and it is increased. Thus, it is credited.
  • Deferred tax liability is a liability and it is increased. Thus, it is credited...

2.

To determine

Prepare the lower portion of Company W’s income statement.

3.

To determine

Explain the manner of reporting income tax items in the balance sheet of Company W.

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