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Valuation Account At the end of 2019, its first year of operations, Beattie Company reported taxable income of $38,000 and pretax financial income of $34,400. The difference is due to the way the company handles its warranty costs. For tax purposes, Beattie deducts the warranty costs as they are paid. For financial reporting purposes, Beattie provides for a year-end estimated warranty liability based on future expected costs. Beattie is subject to a 30% tax rate for 2019, and no change in the tax rate has been enacted for future years. Based on verifiable evidence, the company decides it should establish a valuation allowance of 60% of its ending deterred tax asset.
Required:
- 1. Prepare Beattie’s income tax journal entry at the end of 2019.
- 2. Prepare the lower portion of Beattie’s 2019 income statement.
1.
Prepare journal to record the entry for income tax of Company B at the end of 2019.
Valuation Allowance: Valuation allowance is that financial item that offsets the deferred tax assets either fully or partly as deferred tax assets are more likely not realizable.
Prepare journal to record the entry for income tax of Company B at the end of 2019:
| Date | Accounts title and explanation | Post Ref. |
Debit ($) |
Credit ($) |
| 2019 | ||||
| December 31 | Income Tax Expense (balancing figure) | 10,320 | ||
| Deferred Tax Asset (1) | 1,080 | |||
| Income Tax Payable | 11,400 | |||
| (To record income tax expense with deferred tax asset) | ||||
| December 31 | Income Tax Expense | 648 | ||
| Allowance to reduce deferred tax asset to realizable value | 648 | |||
| (To record the creation of valuation allowance) |
Table (1)
December 31, 2019: To record income tax expense with deferred tax asset:
- Income Tax Expense is the component of stockholders’ equity and decreased, so debit it for $10,320.
- Deferred Tax Asset is an asset and increased, so debit it for $1,080.
- Income Tax Payable is a liability and increased, so credit it for $11,400.
December 31, 2019: To record the creation of valuation allowance:
- Income Tax Expense is the component of stockholders’ equity and decreased, so debit it for $648.
- Allowance to reduce deferred tax assets to realizable value is a contra asset account and increases, so credit for $648...
2.
Prepare the lower portion of Company B’s income statement for 2019.
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