Smyrna Company had financial and taxable incomes as follows:
?
2016
2017
2018
Pretax financial income
$150,000
$140,000
$135,000
Taxable income
115,000
140,000
170,000
The tax rate for all three years was 30%.
?
Required:
a.Prepare the journal entries to record income taxes for all three years.b.Explain why the taxes paid in 2018 are different from the tax return and the amount reported in the financial statements and provide an example of what could cause this difference.
What will be an ideal response?
| a. | 2016 | ? | ? | |
| ? | Income Tax Expense ($150,000´.3) | 45,000 | ? | |
| ? | ? | Deferred Tax Liability ($35,000´.3) | ? | 10,500 |
| ? | ? | Income Taxes Payable ($115,000´.3) | ? | 34,500 |
| ? | ? | ? | ? | |
| ? | 2017 | ? | ? | |
| ? | Income Tax Expense ($140,000´.3) | 42,000 | ? | |
| ? | ? | Income Taxes Payable ($140,000´.3) | ? | 42,000 |
| ? | ? | ? | ? | |
| ? | 2018 | ? | ? | |
| ? | Income Tax Expense ($135,000´.3) | 40,500 | ? | |
| ? | Deferred Tax Liability ($35,000´.3) | 10,500 | ? | |
| ? | ? | Income Taxes Payable ($170,000´.3) | ? | 51,000 |
| ? | ? | |||
| b. | During 2016, there was an item that resulted in more financial income (pretax financial income on the income statement) than taxable income. This could have happened, for example, by using straight-line depreciation for financial purposes and MACRS for tax purposes. Therefore, in 2016, there was less tax paid than expense shown in the financial statements. As a result, when this item reversed, the impact was such that more taxes were paid in 2018. Due to the time value of money concept, Smyrna paid less real cash, although over time the accounting records balanced. | |||
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