question archive The pre-tax income statements for Moonstone Ltd

The pre-tax income statements for Moonstone Ltd

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The pre-tax income statements for Moonstone Ltd. for two years (summarized) were as follows:

  20X8 20X9
Revenues $ 282,000   $ 346,000  
Expenses   189,000     245,000  
Pre-tax income $ 93,000   $ 101,000  
 


For tax purposes, the following income tax differences existed:

  1. Revenues on the 20X9 statement of profit and loss include $45,000 rent, which is taxable in 20X8 but was unearned at the end of 20X8 for accounting purposes.
  2. Expenses on the 20X9 statement of profit and loss include political contributions of $16,500, which are not deductible for income tax purposes.
  3. Expenses on the 20X8 statement of profit and loss include $21,700 of estimated warranty costs, which are not deductible for income tax purposes until 20X9.


Required:
1. What was the accounting carrying value and tax basis for unearned revenue and the warranty liability at the end of 20X8 and 20X9? (Leave no cells blank - be certain to enter "0" wherever required.)

2. Compute (a) income tax payable, (b) deferred income tax, and (c) income tax expense for each period. Assume a tax rate of 30%. (Amounts to be deducted should be indicated by a minus sign.)

3. Give the entry to record income taxes for each period. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

4. Complete statements of profit and loss to include income taxes expense.

5. What amount of deferred income tax will be reported on the statement of financial position at each year-end?

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Answer to Part 1)

  20X8 20X9
Particulars Carrying Amount (in $) Tax Base (in $) Carrying Amount (in $) Tax Base (in $)
Unearned Revenue 45,000 45,000 0 0
Warranty Liability 21,700 0 0 0

Answer to Part 2)

a) Income-tax payable

Particulars 20X8 20X9
Pre-tax income 93,000 101,000
Add/(Less):    
Unearned Rent 45,000 (45,000)
Political Contribution 0 16,500
Warranty Liability 21,700 (21,700)
Taxable Income 159,700 50,800
Tax Rate 30% 30%
Income tax liability 47,910 15,240

b) Deferred Tax Asset/(Liability)

Particulars 20X8 20X9
Unearned Revenue 45,000 0
Warranty Liability 21,700 0
Deferred Tax Assets 66,700 0
Tax Rate 30% 30%
DTA 20,010 0

c) Tax expense

Particulars 20X8 20X9
Income-tax expense 47,910 15,240
Deferred Tax Assets (20,010) 20,010
Total Tax expense 27,900 35,250

Answer to Part 3)

Year Particulars Debit Credit
20X8 Profit & Loss A/c 47,910  
  Income Tax Payable   47,910
       
20X8 Deferred Tax Asset 20,010  
  Profit & Loss A/c   20,010
       
20X9 Profit & Loss A/c 15,240  
  Income Tax Payable   15,240
       
20X9 Profit & Loss A/c 20,010  
  Deferred Tax Asset   20,010

Answer to Part 4)

Statement of Profit & Loss

Particulars 20X8 20X9
Revenue 282,000 346,000
Less: Expenses 189,000 245,000
Profit before tax expense 93,000 101,000
Less: Tax expense    
Current tax expense 47,910 15,240
Deferred income tax 20,010 (20,010)
Total tax expense 67,920 (4,770)
Profit after tax 25,080 105,770

Answer to Part 5)

Statement of Financial Position

Particulars 20X8 20X9
Current Assets    
Deferred Income tax 20,010 0