Reference no: EM132964964

Apples Ltd. was incorporated in 2017 but began its business operations only on January 1, 2018. During its first year, 2017, it purchased specialized equipment costing $5,500,000 on which it was allowed, in the same year, an initial depreciation of $1,100,000.

Although Apples did not generate any revenues nor incur any expenses during its first year, it claimed the permissible depreciation for 2017.

The equipment with a useful life of 5 years, was depreciated on a straight-line basis beginning 2018 for financial reporting purposes.

It reported the following events causing differences between pretax accounting income and taxable income during 2018:

• Apples, using an accelerated method for tax purposes will depreciate $2,000,000 in 2018 and in each of the following three years, 2019, 2020, 2021, it will depreciate $800,000 per year.
• On December 31, 2018, Apples collected $700,000 for future delivery of 35,000 bottles of its Apple Cider Vinegar. It is scheduled to deliver 21,000 bottles in 2019 and the remainder in 2020.
• Apples invests in green bonds issued by the government which provides tax-free returns. In 2018, the company reported $80,000 of investment income from these bonds on its income statement.
• In a promotion campaign, Apples provides a warranty to all buyers of its apple cider vinegar. The company estimates that this warranty will cost 10% of sales. Sales of their apple cider vinegar in 2018 amounted to $1,000,000 and the firm recorded an accrued warranty expense of $100,000. These warranties expire in two years. On December 31, 2018, the company reported a balance of $93,000 in the estimated liability for product warranties.
• In 2018, it decided to rent some land. It received rent in advance for four years, from 2018 to 2021. Each year, an equal amount was to be recognized by the company as rent revenues. It reported $111,000 as unearned rent for the remaining three years on its balance sheet as at December 31, 2018.
• Further in the same year, it sold off an excess piece of land for an amount of $300,000, thereby generating a profit of $120,000 which was duly recognized in 2018. Cash was received from a 30% down payment with the balance being 40% receivable in 2019 and 30% in 2020.
• In 2018, Apples insured the life of its employees. The premiums paid amounted to $50,000.
• The company operates with a 40% tax rate and reported income before tax of $5,000,000 under ASPE for 2018.

Required

Problem 1) Determine the income tax payable in 2018 and record it with an appropriate journal entry. Be sure to show your computations in detail and in a well-organized schedule.

Problem 2) Determine the balance in the deferred tax asset and liability account as at December 31, 2018. Show your computations in a well-organized schedule. Also, prepare any journal entry/entries required for this purpose.

Problem 3) Show clearly how the deferred tax asset or liability will be reported on the balance sheet as at December 31, 2018. Clearly show the details of your work.

Problem 4) Prepare an income statement (part only) beginning with income before taxes for 2018.