Assume that Firm ABC has revenues of $120,000 for both 2017 and 2018. It also has operating expenses of $40,000 for each of these years. In addition, Firm ABC accrues a loss and related liability of $10,000 for financial reporting purposes because of pending litigation. Firm ABC cannot deduct this amount for tax purposes until it pays the liability, expected in 2018. As a result, a deductible amount will occur in 2018 when Firm ABC settles the liability, causing taxable income to be lower than pretax financial information. 20172018Revenues 120,000120,000Expenses 40,00040,000Litigation Loss10,000 Pretax Financial Income70,00080,000Income Tax Expense (40%)28,00032,000 20172018Revenues 120,000120,000Expenses 40,00040,000Litigation Loss 10,000Taxable Income80,00070,000Income Tax Expense (40%)32,00028,000Q1) Journalize the entry at 12/31/2017 to record income tax expense, deferred tax asset, and income taxes payable:Q2) Journalize the entry at 12/31/2018 to record income tax expense, deferred tax asset, and income taxes payable:

Date Particulars Debit Credit 31-12-2017 Income tax expense a/c Dr 48,000 To Income Tax…

Answered: Assume that Firm ABC has revenues of…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Assume that Firm ABC has revenues of $120,000 for both 2017 and 2018. It also has operating expenses of $40,000 for each of these years. In addition, Firm ABC accrues a loss and related liability of $10,000 for financial reporting purposes because of pending litigation. Firm ABC cannot deduct this amount for tax purposes until it pays the liability, expected in 2018. As a result, a deductible amount will occur in 2018 when Firm ABC settles the liability, causing taxable income to be lower than pretax financial information.

	2017	2018
Revenues	120,000	120,000
Expenses	40,000	40,000
Litigation Loss	10,000
Pretax Financial Income	70,000	80,000
Income Tax Expense (40%)	28,000	32,000

	2017	2018
Revenues	120,000	120,000
Expenses	40,000	40,000
Litigation Loss		10,000
Taxable Income	80,000	70,000
Income Tax Expense (40%)	32,000	28,000

Q1) Journalize the entry at 12/31/2017 to record income tax expense, deferred tax asset, and income taxes payable:

Q2) Journalize the entry at 12/31/2018 to record income tax expense, deferred tax asset, and income taxes payable:

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