1. 2. Problem 19-04 The accounting records of Flounder Inc. show the following data for 2020...

Q-1) Calculation

Notes

1.Interest on State of New York bond is not taxed, hence the income has to be reduced from the Accounting income to arrive at taxable income

2.Fines incurred for pollution violation wont be allowed as deduction for tax purposes, hence has to be added back to the Accounting income to arrive at taxable income

3.Depreciation as per the accounting books is lower than that of tax books hence the shortfall of 28,800 has to be reduced from the accounting income to arrive at taxable income

4.Only 73,200 of Installment sales can be recognized for tax purposes hence the income of 36,800 over and above the 73,200 should be reduced from the accounting income to arrive at taxable income

5.For tax purposes only the actual cost of warranty can be allowed and the amount provided hence the warranty expense over and above 9,300 should be added back to the Accounting Income to arrive at taxable income

Q-2) Entry

Note - A single entry has been passed for deferred tax (summation of deferred tax asset and liability)

Alternate- 2

Income tax payable is calculated as the Taxable income as per books (i.e. minus the permanent differences) multiplied by the tax rate; Income tax expense is the taxable income multiplied by the tax rate ; Deferred tax asset/liability is the balancing figure

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$ Particulars Pretax Financial Income $ 713,600 Permanent differences Interest revenue on state of Newyork bonds (Note-1) Insurance expense Fines incurred for pollution violation (Note-2) (4,300) 9,900 4,500 10,100 723,700 Temporary differences Depreciation (Note-3) Installment - sales method (Note-4) Warranty expenses (Note-5) (28,800) (36,800) 41,800 (23,800) 699,900 699,900 Taxable income

Depreciation (Accounting purpose) Depreciation (Tax (1) purpose) (2) 57,600 86,400 (288,000 / 5 years) (288,000 x 30%) Difference (1-2) (28,800)

Credit Account title and explantion Income tax expense Debit 209,970 (699,900 x 30%) 7,140 (23,800 x 30%) Deferred tax Asset Income tax payable 217,110 (723,700 x 30%) (To record income tax payable)

Credit Account title and explantion Income tax expense Debit 209,970 (699,900 x 30%) 19,680 (65,600 x 30%) Deferred tax Asset Income tax payable Deferred tax Liability 217,110 (723,700 x 30%) 12,540 (41,800 x 30%) 229,650 (To record income tax payable) 229,650