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:

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:

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.