The accounting records of Nash Inc. show the following data for 2017 (its first year of operations). 1. Life insurance expense on officers was $13,000.
2. Equipment was acquired in early January for $307,000. Straight-line depreciation over a 5-year life is used, with no salvage value. For tax purposes, Nash used a 30% rate to calculate depreciation.
3. Interest revenue on State of Iowa bonds totaled $4,000.
4. Product warranties were estimated to be $55,000 in 2017. Actual repair and labor costs related to the warranties in 2017 were $10,000. The remainder is estimated to be paid evenly in 2018 and 2019.
5. Pretax financial income was $850,000. The tax rate is 30%.
Prepare a schedule starting with pretax financial income in 2017 and ending with taxable income in 2017 Prepare the journal entry for 2017 to record income taxes payable, income tax expense, and deferred income taxes.

Nash Inc.

1. A schedule of taxable income for 2017:

Pretax financial income = $850,000

add:

1. Life Insurance for officers  13,000

2. Interest on Iowa bonds      (4,000)

Excess Depreciation            (30,700) ($92,100 - $61,405)

Non-tax allowed warranties 45,000 ($55,000 - $10,000)

Adjusted pre-tax income   $873,300

Income tax expense (30%) $261,990

2. Journal entry:

Debit Income tax expense $261,990

Credit Income tax payable $261,990

To record income tax payable.

Debit Deferred Tax Asset $13,550

Credit Profit and Loss Account $13,550

To record the deferred tax asset.

Debit Profit and Loss Account $9,210

Credit Deferred Tax Liability $9,210

To record the deferred tax liability.

Explanation:

a) Data and Analysis:

Pretax financial income = $850,000

add:

1. Life Insurance for officers  13,000

2. Interest on Iowa bonds      (4,000)

Excess Depreciation            (30,700) ($92,100 - $61,405)

Non-tax allowed warranties 45,000 ($55,000 - $10,000)

Adjusted pre-tax income   $873,300

Income tax expense (30%) $261,990

Depreciation Excess/Differences:

Equipment cost = $307,000

Depreciation with straight line (5 years)

Annual accounting depreciation expense = $61,400 ($307,000/5)

Annual taxation depreciation expense = $92,100 ($307,000 * 30%)

Deferred tax liability:

Excess Depreciation            (30,700) * 30% =  $9,210

Deferred tax asset:

Non-tax allowed warranties 45,000 * 30$ = $13,550