Question
Paul Company reports pretax financial income of $80,000 for 2016, its first year in business. Differences between book income and tax income include the following
Paul Company reports pretax financial income of $80,000 for 2016, its first year in business. Differences between book income and tax income include the following items (assume a 40% tax rate):
1. Depreciation on the tax return is greater than that on the income statement by $16,000.
2. Rent revenue recognized on the tax return is greater than that recognized on the income statement by $25,000.
3. Fines for pollution appear as an expense of $15,000 on the income statement.
Required: a. Prepare a reconciliation of book income to taxable income.
b. Prepare the journal entry to record tax related items for 2016.
c. Prepare the income tax expense section of the income statement for 2016.
Prepare only journal entries and no T accounts. Show all math and what math you used to arrive at your numbers. Any numbers that are not clearly described on how you arrived at those numbers, or if those numbers have to be interpreted, will not be given credit.
Paul Company has a deferred tax asset account with a balance $140,000 at the end of 2015 due to a single cumulative temporary difference of $350,000. At the end of 2016, this same temporary difference has increased to an amount of $500,000. Taxable income for 2016 is $1,200,000. The tax rate for all years is 40%, and there is no beginning balance in the allowance (valuation) account related to deferred tax assets at the end of 2015.
Required: a. Prepare the journal entry to record tax related items for 2015.
b. Prepare the journal entry assuming it is more likely than not that only one half
of the deferred tax asset will be realized.
Prepare only journal entries and no T accounts. Show all math and what math you used to arrive at your numbers. Any numbers that are not clearly described on how you arrived at those numbers, or if those numbers have to be interpreted, will not be given credit.
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