Reference no: EM132886893
Question 1 - Murphy Company purchased equipment for $450,000 on January 2, 2020, its first day of operations. For book purposes, the equipment will be depreciated using the straight-line method over three years with no salvage value. Pretax financial income and taxable income are as follows:
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2020
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2021
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2022
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Pretax financial income
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$224,000
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$260,000
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$300,000
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Taxable income
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184,000
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260,000
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340,000
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The temporary difference between pretax financial income and taxable income is due to the use of accelerated depreciation for tax purposes.
Required -
(a) Prepare the journal entries to record income taxes for all three years (expense, deferrals, and liabilities) assuming that the enacted tax rate applicable to all three years is 20%.
(b) Prepare the journal entries to record income taxes for all three years (expense, deferrals, and liabilities) assuming that the enacted tax rate as of 2020 is 20% but that in the middle of 2021, Congress raises the income tax rate to 25% retroactive to the beginning of 2021.
Question 2 - The following differences enter into the reconciliation of financial income and taxable income of Abbott Company for the year ended December 31, 2020, its first year of operations. The enacted income tax rate is 20% for all years.
Pretax accounting income $800,000
Excess tax depreciation (480,000)
Litigation accrual 70,000
Unearned rent revenue deferred on the books but appropriately recognized in taxable income 60,000
Interest income from New York municipal bonds (20,000)
Taxable income $430,000
1. Excess tax depreciation will reverse equally over a four-year period, 2021-2024.
2. It is estimated that the litigation liability will be paid in 2024.
3. Rent revenue will be recognized during the last year of the lease, 2024.
4. Interest revenue from the New York bonds is expected to be $20,000 each year until their maturity at the end of 2024.
Required -
(a) Prepare a schedule of future taxable and (deductible) amounts.
(b) Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2020.