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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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Interperiod Tax Allocation Peterson Company has computed its pretax financial income to be $66,000 in 2019 after including the effects of the appropriate items from the following information:

Chapter 18, Problem 9P, Interperiod Tax Allocation Peterson Company has computed its pretax financial income to be 66,000 in , example  1

Peterson’s accountant has prepared the following schedule showing the future taxable and deductible amounts at the end of 2019 for its three temporary differences:

Chapter 18, Problem 9P, Interperiod Tax Allocation Peterson Company has computed its pretax financial income to be 66,000 in , example  2

At the beginning of 2019, Peterson had a deferred tax liability of $12,540 related to the depreciation difference and $4,710 related to the accrual-basis sales difference. In addition, it had a deferred tax asset of $14,850 related to the warranty difference. The current tax rate is 30%, and no change in the tax rate has been enacted for future years.

Required:

  1. 1. Compute Peterson’s taxable income for 2019.
  2. 2. Prepare Peterson’s income tax journal entry for 2019 (assume no valuation allowance is necessary).
  3. 3. Next Level Identify the permanent differences in Items 1 through & and explain why you did or did not account for them as deferred tax items in Requirement 2.

1.

To determine

Determine the taxable income of Company P for 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.

Determine the taxable income of Company P for 2019:

Computation of taxable income
ParticularsAmount
Pre-tax financial income$66,000
Add: Excess of depreciation in financial reporting over tax income (1)$8,000
Excess of warranty expense in financial reporting over tax income (2)$7,000
Non-deductible  officer's insurance premium for tax purpose$15,000
 $96,000
Less: Non-taxable interest of Municipal bonds($25,000)
Excess of depletion percentage over cost depletion($10,000)
Excess of gross profit recognized for financial reporting over tax purpose (3)($11,000)
Taxable Income$50,000

Table (1)

Thus, the taxable income of Company P is $50,000.

Working Note 1: Determine the Excess of depreciation in financial reporting over tax income:

Excess of depreciation=(Depreciation taken for financial reporting purposes)(Depreciation taken for tax purposes)= $48,000

2.

To determine

Record the income tax entry for Company P.

3.

To determine

Determine the permanent differences in Items 1 through 8 and elaborate the reasons for accounting the deferred tax items in requirement 2.

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