Accounting for Income Taxes

Assignment 2

Accounting for Income Taxes

EXERCISE 19-18 (Three differences, Multiple Rates, Future Taxable Income).

During 2012, Graham Co.’s first year of operations, the company reports pretax financial income of $250,000. Graham’s enacted tax rate is 40% for 2012, and 35% for all later years. Graham expects to have taxable income for each of the next 5 years. The effects on future tax returns of temporary differences existing at December 31, 2012, are summarized below:

Future Years |

| 2013 | 2014 | 2015 | 2016 | 2017 | Total |

Future taxable (deductible) amounts: | | | | | | |

Installment sales | $32,000 | $32,000 | $32,000 | | | $ 96,000 |

Depreciation | 6,000 | 6,000 | 6,000 | $ 6,000 | $ 6,000 | 30,000 |

Unearned rent | (50,000) | (50,000) | | | | (100,000) |

(a) Complete the schedule below to compute deferred taxes at December 31, 2012:

| Temporary Difference | Future Taxable (Deductible) Amounts | Tax Rate | December 31, 2012Deferred Tax |

| | | | (Asset) | Liability |

| Installment sales | ($ 96,000 | 35% | | $33,600 |

| Depreciation | 30,000 | 35% | | 10,500 |

| Unearned rent | ( (100,000) | 35% | $(35,000) |               |

| Totals | ($ 26,000 | | $(35,000) | $44,100 |

(b) Compute taxable income for 2012:

Pretax financial income for 2012 $250,000

Excess sales (96,000)

Excess depreciation per tax return (30,000)

Rent paid in advance 100,000

Taxable income $224,000

(c) Prepare the journal entry to record income taxes payable, deferred taxes, and income tax expense for 2012:

Taxable income $ 224,000

Tax rate...