Concept explainers
1.
Prepare journal to record the entry for income tax of Company K at the end of 2016.
1.
Explanation of Solution
Prepare journal to record the entry for income tax of Company K at the end of 2016:
Date | Account title and Explanation | Post ref. | Amount | |
Debit | Credit | |||
2016 | ||||
December 31 | Income tax expense (balancing figure) | $117,870 | ||
Deferred tax asset (1) | $6,000 | |||
Deferred tax liability (2) | $12,000 | |||
Income tax payable (3) | $108,000 | |||
Deferred tax liability (4) | $23,370 | |||
Deferred tax asset (5) | $4,500 | |||
(To record the income tax payable) |
Table (1)
- Income Tax Expense is a component of
stockholders’ equity and decreases, so debt it for $117,870. - Deferred Tax Asset is an asset and increases, so debit it for $6,000.
- Deferred Tax Liability is a liability and decreases, so debit it for $12,000.
- Income Tax Payable is a liability and increases, so credit it for $108,000.
- Deferred Tax Liability is a liability and increases, so credit it for $23,370.
- Deferred Tax Asset is an asset and decreases, so credit it for $4,500.
Working note 1: Determine the deferred tax asset:
Working note 2: Determine the Deferred tax liability:
Working note 3: Determine the income tax payable:
Working note 4: Determine the deferred tax liability:
Working note 5: Determine the deferred tax asset:
2.
Prepare the condensed income statement of Company K.
2.
Explanation of Solution
Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Prepare the condensed income statement of Company K.
Particulars | Amount |
Revenues | $750,000 |
Less: Expenses | ($447,100) |
Income before income taxes | $302,900 |
Income tax expense | ($117,870) |
Net income | $185,030 |
Table (2)
Thus, the net income of Company K is $185,030.
3.
Explain the manner of reporting income tax items in the balance sheet of Company K.
3.
Explanation of Solution
Balance sheet: Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.
Prepare balance sheet of Company K as on December 31, 2016:
Company K | |
Balance sheet (partial) | |
As on December 31, 2016 | |
Assets | Amount |
Current asset | |
$6,000 | |
Liabilities | |
Current liabilities: | |
Income tax payable | $108,000 |
Non- Current liabilities: | |
Deferred tax liability (6) | $73,080 |
Table (3)
Thus, the deferred tax asset, income tax payable and deferred tax liability as on December 31, 2016 for Company K are $6,000, $108,000 and $73,080 respectively.
Working Note 6: Determine the net deferred tax liability reported in balance sheet:
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