The following information is available for the first three years of operations for Santos Inc.: Year Earnings
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Question:
The following information is available for the first three years of operations for Santos Inc.:
- Year Earnings Before Tax
2020 $670,000
2021 715,000
- i). Depreciation of property, plant and equipment for financial reporting purposes amounts to $60,000 each year for 2020-2022. The company is able to deduct the full cost under the IRS Code Section 179 $180,000 amount allowed for tax purposes in 2020 (note there is no tax depreciation in future years).
- ii). On October 1, 2020, $360,000 was collected in advance for rental of a building for a two-year period October 1, 2020 – September 30, 2022. The entire $360,000 was reported as taxable income in 2020. The company uses the accrual basis of accounting for financial statement purposes.
- iii). Santos Inc. insures the lives of its chief executives every year. The annual payment is $12,000 and this amount is included as an expense on the income statement each year.
- iv). The company sells its merchandise on an installment contract basis. In 2020, Santos Inc. reported gross profit of $220,000 tax purposes, and $420,000 for financial statement purposes. This will result in taxable amounts of $100,000 in each of the next two years.
- v). Interest recognized on tax-exempt municipal bonds amounts are fixed and will be $20,000 each year in 2020, 2021 and 2022.
- vi). Warranty expense accrued for financial reporting was $26,000 in 2020. Warranty deductions on the tax returns are $14,000 in 2020, $9,000 in 2021 and $3,000 in 2022.
- vii). In 2021 Thompson Inc. recorded a $45,000 accrual for litigation liability which will be paid in 2022.
- viii). The enacted tax rates existing at December 31, 2020 are 30% for 2020 and 34% for 2021 and thereafter.
Instructions
- a). Complete the worksheet provided. It includes the following.
- b). Prepare a reconciliation of Book Income to Taxable Income for 2020.
- c). Prepare a schedule of future taxable and (deductible) amounts at the end of 2020.
- d). Prepare a schedule of the deferred tax (asset) and liability at the end of 2020.
- e). Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2020.
- f). Show how the deferred income taxes should be reported on the Balance Sheet on December 31, 2020.
- g). Show how the taxes should be reported on the Income Statement on December 31, 2020.
- i). Repeat a. to f. above for 2021.
Related Book For
Intermediate Accounting
ISBN: 978-0324592375
17th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen
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