Tax Accounting Homework First Semester 2021/2022 Majan Company began its operations in 2019 and has provided the following information: 1. Pretax financial income for 2019 is OR100,000. 2. The tax rate enacted for 2019 and future years is 15%. 3. Differences between the 2019 income statement and tax return are listed below: (a) Warranty expense accrued for financial reporting purposes amounts to OR5,000. Warranty deductions per the tax return amount to OR 2,000. (b) Gross profit on leases a machinery contract using the percentage-of-completion method for books amounts to OR 90,000. Gross profit on construction contracts for tax purposes amounts to OR 60,000. (c) Depreciation of property, plant, and equipment for financial reporting purposes amounts to OR 50,000. Depreciation of these assets amounts to OR 70,000 for the tax return. (d) A OR 3,500 fine paid for violation of pollution laws was deducted in computing pretax financial income. (e) Interest revenue earned on an investment in tax-exempt municipal bonds amounts to OR 1,400. 4. Taxable income is expected for the next few years. Instructions: (a) Compute taxable income for 2019. (b) Compute the deferred taxes at December 31, 2019, that relate to the temporary differences described above. (c) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2019. (d) Draft the income tax expense section of the income statement, beginning with "Income before income taxes." SOLUTION (a): Pretax financial income Permanent differences: Fine for pollution Tax-exempt interest Originating temporary differences: Excess warranty expense per books (OROR) OR Excess leases machinery profits per books (OR. -OR Excess depreciation per tax (OR..........OR........) Taxable income OR (b): Deferred Tax Temporary Difference Future Taxable (Deductible) Amounts Rate (Asset) Liability Warranty costs OR () OR () Construction contracts Depreciation Totals OR (c) Income Tax Expense Deferred Tax Asset Deferred Tax Liability Income Taxes Payable (OR... 2 .%) % OR OR () OR Taxable income for 2019 [from part (a)] Tax rate Income taxes payable for 2019 Deferred tax liability at the end of 2019 [from part (b)] Deferred tax liability at the beginning of 2019 Deferred tax expense for 2019 Deferred tax asset at the end of 2019 [from part (b)] Deferred tax asset at the beginning of 2019 Deferred tax benefit for 2019 OR OR.................. OR -0- OR................. OR OR -- (d) Income before income taxes Income tax expense Current Deferred Net income OR OR OR