Question
Crandall Corp. was formed in 2011. Relevant information pertaining to 2011, 2012, and 2013 is as follows: 2011 2012 2013 Earnings before income tax $100,000
Crandall Corp. was formed in 2011. Relevant information pertaining to 2011, 2012, and 2013 is as follows:
| 2011 | 2012 | 2013 |
Earnings before income tax | $100,000 | $100,000 | $100,000 |
Accounting income includes the following: |
|
|
|
Depreciation (assets have a cost of $120,000) | 10,000 | 10,000 | 12,000 |
Pension expense* | 5,000 | 7,000 | 10,000 |
Warranty expense | 3,000 | 3,000 | 3,000 |
Dividend income (nontaxable) | 2,000 | 2,000 | 3,000 |
Taxable income includes the following: |
|
|
|
Capital cost allowance | 25,000 | 15,000 | 7,000 |
Pension funding (amount paid) | 7,000 | 8,000 | 9,000 |
Warranty costs paid | 1,000 | 4,000 | 3,000 |
Tax rate enacted each year | 40% | 44% | 48% |
*Pension amounts are tax deductible when paid, not when expensed. Over the long term, payments will equal total expense. The tax basis for the pension will always be zero. For accounting purposes, there will be a statement of financial position asset account called deferred pension cost for the difference between the amount paid and the expense, since the amount paid is higher. |
Required
- Prepare the journal entry to record income tax expense for each year under both the taxes payable method and the comprehensive tax allocation method.
- Reconcile the deferred tax adjustment for 2012 and 2013. How much is caused by the change in the tax rate and how much is caused by the temporary differences.
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