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:
- 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.
- Expenses on the 20X9 statement of profit and loss include political contributions of $16,500, which are not deductible for income tax purposes.
- 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 |
