# The statements of profit and loss for Gardner Corporation for two years (summarized) were as follows: The

## Question:

The statements of profit and loss for Gardner Corporation for two years (summarized) were as follows:

The income tax rate is $$38 \%$$ in $$20 \mathrm{X} 4$$ and $$40 \%$$ in $$20 \mathrm{X} 5$$. The $$20 \mathrm{X} 5$$ tax rate was enacted in 20X5. For tax purposes, the following differences existed:

a. Expenses (given above) on the 20X4 and 20X5 statements of profit and loss include golf club dues of $$\ 20,000$$ annually, which are not deductible for income tax purposes.

b. Revenues (given above) on the 20X5 statement of profit and loss include $$\ 20,000$$ rent revenue, which was taxable in $$20 \mathrm{X} 4$$ but was unearned for accounting purposes until 20X5.

c. Expenses (given above) on the 20X4 statement of profit and loss include $$\ 16,000$$ of estimated warranty costs, which are not deductible for income tax purposes until paid in $$20 \times 6$$.

Required:
1. Explain whether each difference is a permanent or temporary difference.
2. Calculate income tax payable for each year.
3. Calculate income tax expense for each of $$20 \times 4$$ and 20X5. Also calculate the balance in the deferred income tax account at the end of $$20 \mathrm{X} 4$$ and $$20 \mathrm{X} 5$$.

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