Chapter 18 Quizzes Flashcards
(A) Waters Company began operations at the beginning of 2024. The following information pertains to this company.
- Pretax financial income:
2024: $850,000
2025: $1,250,000
2026: $2,875,000 - The tax rate enacted for 2025 is 15%
- Differences between the 2025 income statement and tax return are listed below:
a) Interest revenue earned on an investment in tax-exempt municipal bonds amounts to $3,000 in 2024, $4,500 in 2025, and $4,000 in 2026.
b) Revenue in 2026 on a construction contract is $800,000 for tax purposes. For financial statement purposes, revenue will amount to $150,000 in 2024, $250,000 in 2025, and the remainder in 2026. This is Harper’s only construction contract during 2024-2026.
c) Depreciation of equipment for financial reporting purposes is calculated using the straight-line method. Harper purchased equipment on January 1, 2025 at a cost of $100,000. The equipment has a life of 5 years and a $10,000 salvage value. Depreciation of the equipment for the tax return will be based on double-declining balance with a life of 5 years.
d) A $15,000 fine paid for violation of EPA laws was deducted in computing pretax financial income in 2025.
e) Rent collected in advance on January 1, 2025, totaled $30,000 for a 3-year period.
- Taxable income expected for the next few years.
Compute taxable income for 2024, 2025, and 2026. Then prepare the journal entries on December 31, 2024, 2025, and 2026 related to taxes.
Construction Contract:
2024: (Fin) 150,000 - (Tax) 0 = 150,000
2025: (Fin) 250,000 - (Tax) 0 = 250,000
2026: (Fin) 400,000 - (Tax) 800,000 = -400,000
—
Rent:
2024: N/A
2025: (Fin) 10,000 - (Tax) 30,000 = -20,000
2026: (Fin) 10,000 - (Tax) 0 = 10,000
—
Depreciation:
2 / 5 (double-declining balance) = 40%
Fin: (100,000 - 10,000) / 5 = 18,000 per year
Tax (2025): 40% x 100,000 = 40,000
Tax (2026): 40% x (100,000 - 40,000): 24,000
2024: N/A
2025: (Fin) 18,000 - (Tax) 40,000 = -22,000
2026: (Fin) 18,000 - (Tax) 24,000 = -6,000
(B) Waters Company began operations at the beginning of 2024. The following information pertains to this company.
- Pretax financial income:
2024: $850,000
2025: $1,250,000
2026: $2,875,000 - The tax rate enacted for 2025 is 15%
- Differences between the 2025 income statement and tax return are listed below:
a) Interest revenue earned on an investment in tax-exempt municipal bonds amounts to $3,000 in 2024, $4,500 in 2025, and $4,000 in 2026.
b) Revenue in 2026 on a construction contract is $800,000 for tax purposes. For financial statement purposes, revenue will amount to $150,000 in 2024, $250,000 in 2025, and the remainder in 2026. This is Harper’s only construction contract during 2024-2026.
c) Depreciation of equipment for financial reporting purposes is calculated using the straight-line method. Harper purchased equipment on January 1, 2025 at a cost of $100,000. The equipment has a life of 5 years and a $10,000 salvage value. Depreciation of the equipment for the tax return will be based on double-declining balance with a life of 5 years.
d) A $15,000 fine paid for violation of EPA laws was deducted in computing pretax financial income in 2025.
e) Rent collected in advance on January 1, 2025, totaled $30,000 for a 3-year period.
- Taxable income expected for the next few years.
Prepare the journal entries on December 31, 2024, 2025, and 2026 related to taxes.
12/31/24:
D - Income Tax Expense (847,000 x 15%): 127,050
C - Deferred Tax Liability (CC) (150,000 x 15%): 22,500
C - Income Tax Payable (697,000 x 15%): 104,550
12/31/25:
D - Income Tax Expense (1,260,500 x 15%): 189,075
D - Deferred Tax Asset (Rent) (20,000 x 15%): 3,000
C - Deferred Tax Liability (CC) (250,000 x 15%): 37,500
C - Deferred Tax Liability (Dep) (22,000 x 15%): 3,300
C - Income Tax Payable (1,008,500 x 15%): 151,275
12/31/26:
D - Income Tax Expense (2,871,000 x 15%): 430,650
D - Deferred Tax Liability (CC) (400,000 x 15%): 60,000
C - Deferred Tax Asset (Rent) (10,000 x 15%): 1,500
C - Deferred Tax Liability (Dep) (6,000 x 15%): 900
C - Income Tax Payable (3,255,000 x 15%): 488,250
Which numbered item does this statement relate:
Never included in taxable income
- Future taxable amount
- Future deductible amount
- Taxable income
- Financial income
- Temporary difference
- Permanent difference
- Permanent difference
Which numbered item does this statement relate:
Deferred tax asset
- Future taxable amount
- Future deductible amount
- Taxable income
- Financial income
- Temporary difference
- Permanent difference
- Future deductible amount
Which numbered item does this statement relate:
Used to calculate income tax expense
- Future taxable amount
- Future deductible amount
- Taxable income
- Financial income
- Temporary difference
- Permanent difference
- Financial income
Which numbered item does this statement relate:
Deferred tax liability
- Future taxable amount
- Future deductible amount
- Taxable income
- Financial income
- Temporary difference
- Permanent difference
- Future taxable amount
Which numbered item does this statement relate:
Increase taxable income in future years
- Future taxable amount
- Future deductible amount
- Taxable income
- Financial income
- Temporary difference
- Permanent difference
- Future taxable amount
Which numbered item does this statement relate:
Used to calculate income tax payable
- Future taxable amount
- Future deductible amount
- Taxable income
- Financial income
- Temporary difference
- Permanent difference
- Taxable income
Which numbered item does this statement relate:
Represents a future sacrifice
- Future taxable amount
- Future deductible amount
- Taxable income
- Financial income
- Temporary difference
- Permanent difference
- Future taxable amount
Which numbered item does this statement relate:
Gives rise to a probable future benefit
- Future taxable amount
- Future deductible amount
- Taxable income
- Financial income
- Temporary difference
- Permanent difference
- Future deductible amount
Which numbered item does this statement relate:
Can be originating or reversing
- Future taxable amount
- Future deductible amount
- Taxable income
- Financial income
- Temporary difference
- Permanent difference
- Temporary difference
Which numbered item does this statement relate:
Decrease taxable income in future years
- Future taxable amount
- Future deductible amount
- Taxable income
- Financial income
- Temporary difference
- Permanent difference
- Future deductible amount
