Julia Company
Sample Solution
Julia Company - Journal Entry for Tax Provision (2024)
Transaction: Record the tax provision for 2024.
Analysis:
- Pretax accounting income = $74,700
- Taxable income = $8,700
The difference indicates temporary differences. We need to find the taxable expenses and non-deductible expenses.
- Taxable expenses = Pretax accounting income + Temporary differences
- Taxable expenses = $74,700 + ($67,000 - $9,700)
- Taxable expenses = $132,000
Journal Entry:
| Account | Debit | Credit |
|---|---|---|
| Income Tax Expense | $52,800 | |
| Deferred Tax Liability (67,000 - 8,700) | $58,300 | |
| Income Taxes Payable | $8,700 |
Explanation:
- We calculate the tax expense based on the taxable income: $8,700 x 40% = $52,800.
- The difference between depreciation expense ($67,000) and warranty expense ($9,700) is $58,300. This represents the temporary difference that will reverse in future years, creating a deferred tax liability.
- We credit income taxes payable for the current year's tax obligation.
Full Answer Section
Isaac Incorporated - Deferred Tax Liability (2025)
Scenario: Isaac Incorporated uses installment sales method for tax purposes and recognizes $655 million in sales in 2024. The tax rate in 2024 and 2025 is 30%, but it changes to 25% in 2026 and beyond. We need to find the deferred tax liability at the end of 2025.
Analysis:
- We need to consider the tax impact of the future collections based on the different tax rates.
- Year 2024 collections are already taxed in 2024, so they don't affect the deferred tax liability in 2025.
- We will calculate the tax difference for the remaining collections considering the change in tax rate in 2026.
Deferred Tax Calculation:
| Year | Collection Amount (Million) | Tax Rate (Before 2026) | Tax (Before 2026) | Tax Rate (After 2025) | Tax (After 2025) | Tax Difference |
|---|---|---|---|---|---|---|
| 2025 | 124 | 0.3 | 37.2 | - | - | 37.2 |
| 2026 | 140 | 0.3 | 42.0 | 0.25 | 35.0 | 7.0 |
| 2027 | 155 | 0.3 | 46.5 | 0.25 | 38.75 | 7.75 |
| Total | 419 | 125.7 | 112.0 | 13.75 |
Deferred Tax Liability:
The tax difference of $13.75 million represents the future tax benefit due to the lower tax rate in 2026 and beyond. However, since this benefit won't be realized until after 2025, it's recorded as a deferred tax asset in the 2025 balance sheet.
Note: This solution ignores operating expenses and additional sales in 2025 for simplicity. The actual calculation might involve additional considerations if those factors are present.