Question

Allmond Corporation, organized on January 3, 2021, had pretax accounting income of $23 million and taxable income of $29 million for the year ended December 31, 2021. The 2021 tax rate is 25%. The only difference between accounting income and taxable income is estimated product warranty costs. Assume that expected payments and scheduled tax rates (based on recently enacted tax legislation) are as follows:
2022 $4 million 30%
2023 1 million 30%
2024 1 million 30 %
2025 2 million 25%


Required:
a. Determine the amounts necessary to record Allmond’s income taxes for 2021 and prepare the appropriate journal entry.
b. What is Allmond’s 2021 net income?

Answer 1

Answer:

$15.75 million

Explanation:

The Income tax necessary to record in almond's income taxes for 2021 can be calculated by reversing all the warranty cost in 2022 and onwards. The warranty cost will be recorded as a deferred tax asset.  

Requirement A

Warranty costs reversing in:

Date     Amount    Tax rate    Tax    

2022 $4m x 30% = $1.2        Deferred tax Assets

2023 $1m x 30% = $0.3 Deferred tax Assets

2024 $1m x 30% = $0.3 Deferred tax Assets

2025 $2m x 25% = $0.5 Deferred tax Assets

Total deferred tax amount $2.3 Deferred tax Assets

Income tax Payable = Taxabe income x tax rate

Income tax Payable = $29m x 25%

Income tax Payable = $7.25m

Accounting Entry:

                                                      DEBIT            CREDIT

Income tax expense                    $7.25

Deferred tax asset                       $2.3  

Income taxes payable                                         $9.55

Requirement B

Net income for 2021 = Pretax income - Income tax expense

Net income for 2021 = $23M - $7.25

Net income for 2021 = $15.75 million