Jenny
Corporation recorded warranty accruals as at December 31, 2011, in the amount
of $150,000. This reversing difference will cause deductible amounts of $50,000
in 2012, $35,000 in 2013, and $65,000 in 2014. Jenny’s accounting income for 2011
is $135,000 and the tax rate is 25% for all years. There are no future tax
accounts at the beginning of 2011.
Instructions
(a)
Calculate the future income tax balance at December 31, 2011.
(b)
Calculate taxable income and current income taxes payable for 2011.
(c)
Prepare the journal entries to record income taxes for 2011.
(d)
Prepare the income tax expense section of the income statement for 2011,
beginning with the line “Income before income taxes.”
(a)
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Balance
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Deductible
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Sheet
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(Taxable)
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Future Tax
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Account
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Carrying
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Tax
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Temporary
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Tax
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Asset
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Dec. 31, 2011
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Amount
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Basis
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Differences
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Rate
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(Liability)
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Warranty liability
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($150,000)
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$0
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$150,000
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25%
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$37,500
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Future income tax asset,
December 31, 2011
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37,500
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||||
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Future income tax asset
before adjustment
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0
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||||
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Increase in future income
tax asset and future income tax benefit for 2011
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$37,500
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Future years
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||||||
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Total
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2012
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2013
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2014
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Deductible temporary
difference
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Warranty liability
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$150,000
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$50,000
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$35,000
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$65,000
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Tax rate enacted for the
year
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25%
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25%
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25%
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Future tax asset
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$37,500
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$12,500
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$8,750
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$16,250
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(b)
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2013
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Accounting income
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$135,000
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Permanent differences:
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-0-
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Reversing difference:
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Warranty expense >
warranty costs
incurred
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150,000
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Taxable income
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285,000
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Current income taxes – 25%
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$71,250
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(c)
Current Income Tax Expense................ 71,250
Income Tax
Payable ................... 71,250
Future Income Tax Asset................... 37,500
Future
Income Tax Benefit............. 37,500
(d) Income
before income taxes $135,000
Income tax
expense
Current $71,250
Future
benefit (37,500) 33,750
Net income $101,250
