Chapter 18

Question 1

In 2025, Amirante Corporation had pretax financial income of $168,000 and taxable income of $120,000. The difference is due to the use of different depreciation methods for tax and accounting purposes. The effective tax rate is 20%. Compute the amount to be reported as income taxes payable at December 31, 2025.

Answer 1

120,000 x 20% = 24,000

12/31/25 income taxes payable: $24,000

Question 2

Oxford Corporation began operations in 2025 and reported pretax financial income of $225,000 for the year. Oxford’s tax depreciation exceeded its book depreciation by $40,000. Oxford’s tax rate for 2025 and years thereafter is 30%. In its December 31, 2025, balance sheet, what amount of deferred tax liability should be reported?

Answer 2

40,000 x 30% = 12,000

Deferred tax liability: $12,000

Question 3

Oxford Corporation began operations in 2025 and reported pretax financial income of $225,000 for the year. Oxford’s tax depreciation exceeded its book depreciation by $40,000. Oxford’s tax rate for 2025 and years thereafter is 30%. In its December 31, 2025, balance sheet, what amount of deferred tax liability should be reported?

Using the information from the above problem, assume this is the only difference between Oxford’s pretax financial income and taxable income. Prepare the journal entry to record the income tax expense, deferred income taxes, and income taxes payable, and show how the deferred tax liability will be classified on the December 31, 2025, balance sheet.

Answer 3

225,000 - 40,000 = 185,000 x 30% = 55,500

40,000 x 30% = 12,000

55,500 + 12,000 = 67,500

D - Income Tax Expense: 67,500
C - Deferred Tax Liability: 12,000
C - Income Taxes Payable: 55,500

Question 4

At December 31, 2025, Suffolk Corporation had an estimated warranty liability of $105,000 for accounting purposes and $0 for tax purposes. (The warranty costs are not deductible until paid.) The effective tax rate is 20%. Compute the amount Suffolk should report as a deferred tax asset at December 31, 2025.

Answer 4

105,000 x 20% = 21,000

12/31/25 deferred tax asset: $21,000

Question 5

The following information is available for Wenger Corporation for 2024 (its first year of operations).

1. Excess of tax depreciation over book depreciation, $40,000. This $40,000 difference will reverse equally over the years 2025–2028.
2. Deferral, for book purposes, of $20,000 of rent received in advance. The rent will be recognized in 2025.
3. Pretax financial income, $300,000.
4. Tax rate for all years, 20%.

a) Compute taxable income for 2024.
b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2024.
c) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2025, assuming taxable income of $325,000.

Answer 5

a)
300,000 - 40,000 + 20,000 = 280,000

b)
280,000 x 20% = 56,000
—
Depreciation (Liability): 40,000 x 20% = 8,000
Unearned rent (Asset): -20,000 x 20% = -4,000
—
D - Income Tax Expense (56,000 + 8,000 - 4,000): 60,000
D - Deferred Tax Asset: 4,000
C - Income Taxes Payable (280,000 x 20%): 56,000
C - Deferred Tax Liability: 8,000

c)
325,000 + 20,000 = 345,000
40,000 / 4 years (2025-2028) = 10,000
345,000 - 10,000 = 335,000
—
D - Income Tax Expense (335,000 x 20%): 67,000
D - Deferred Tax Liability (40,000 / 4) x 20%): 2,000
C - Income Taxes Payable (325,000 x 20%): 65,000
C - Deferred Tax Asset (20,000 x 20%): 4,000