Two Differences, 2 Years, Compute Taxable Income and Pretax Financial Income
Response to the following problem:
The information shown below was disclosed during the audit of Elbert Inc.
1. Year Amount Due per Tax Return
2014 $130,000
2015 104,000
2. On January 1, 2014, equipment costing $600,000 is purchased. For financial reporting purposes, the company uses straight-line depreciation over a 5-year life. For tax purposes, the company uses the elective straight-line method over a 5-year life. (Hint: For tax purposes, the half-year convention as discussed in Appendix 11A must be used.)
3. In January 2015, $225,000 is collected in advance rental of a building for a 3-year period. The entire $225,000 is reported as taxable income in 2015, but $150,000 of the $225,000 is reported as unearned revenue in 2015 for financial reporting purposes. The remaining amount of unearned revenue is to be recognized equally in 2016 and 2017.
4. The tax rate is 40% in 2014 and all subsequent periods. (Hint: To find taxable income in 2014 and 2015, the related income taxes payable amounts will have to be "grossed up.")
5. No temporary differences existed at the end of 2013. Elbert expects to report taxable income in each of the next 5 years. Instructions
(a) Determine the amount to report for deferred income taxes at the end of 2014, and indicate how it should be classified on the balance sheet.
(b) Prepare the journal entry to record income taxes for 2014.
(c) Draft the income tax section of the income statement for 2014, beginning with "Income before income taxes."
(d) Determine the deferred income taxes at the end of 2015, and indicate how they should be classified on the balance sheet.
(e) Prepare the journal entry to record income taxes for 2015.
(f) Draft the income tax section of the income statement for 2015, beginning with "Income before income taxes."