Question

The following differences enter into the reconciliation of financial income and taxable income of Abbott Company for the year ended December 31, 2020, its first year of operations. The enacted income tax rate is 20% for all years. Pretax accounting income $800,000 Excess tax depreciation (480,000) Litigation accrual 70,000 Unearned rent revenue deferred on the books but appropriately recognized in taxable income 60,000 Interest income from New York municipal bonds (20,000) Taxable income $430,000 1. Excess tax depreciation will reverse equally over a four-year period, 2021-2024. 2. It is estimated that the litigation liability will be paid in 2024. 3. Rent revenue will be recognized during the last year of the lease, 2024. 4. Interest revenue from the New York bonds is expected to be $20,000 each year until their maturity at the end of 2024. Instructions (a) Prepare a schedule of future taxable and (deductible) amounts. (b) Prepare a schedule of the deferred tax (asset) and liability at the end of 2020. (c) Since this is the first year of operations, there is no beginning deferred tax asset or liability. Compute the net deferred tax expense (benefit). (d) Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2020

Answer 1

Answer:

income tax expense 156,000 debit

   deferred income tax liability  70,000 credit

   income tax payable               86,000 credit

schedule:

                      2021          2022    2023   2024

depreciation 120,000 120,000 120,000 120,000

litigation                                                     (70,000)

rent revenue                                                60,000

taxable income 120,000 120,000 120,000 110,000

                        2021       2022      2023           2024

beginning          70,000   46,000   22,000        (2,000)

dep adjustment (24,000) (24,000)  (24,000)   (24,000)

rent revenue                                                         12,000

litigation                                                               14,000

ending                46,000   24,000     (2,000)*             0

Explanation:

pretax income                         800,000

permanent difference:

municipal bonds interest        (20,000)

accounting taxable income   780,000

temporary difference:

depreciation expense (480,000)

litigation                          70,000

rent revenue                   60,000

taxable income                      430,000

480,000 / 4 = 120,000

we have income tax payable: 430,000 x 20% = 86,000

income tax expense 780,000 x 20% = 156,000

deferred tax income laibility 156,000 - 86,000 = 70,000

*on the tax schedule as the value switches to negative we no longer have a tax liability but asset.

the municipal bonds are not considered into calcualtikon as they are tax exempt therefore do not create temporary difference.

Answer 2

Answer:

Abbot makes a savings of $74,000 in the current year.

Review full presentation of answers in the attaches

Explanation: