Charlotte, Inc. began business on January 1, 2021. Its pretax financial income for the first two years was as follows: 2021 $550,0002022 590,000 The following items caused the only differences between pretax financial income and taxable income. In 2021, the company terminated a top executive and agreed to 120,000 of severance pay. The amount will be paid $40,000 per year for 2021 - 2023. The 2021 and 2022 payments were made. For financial statement purposes, the $120,000 was expensed in 2021. For tax purposes, the severance pay is deductible as it is paid. In 2021, the company reported depreciation expense in its financial statements of $82,000. Depreciation expense for tax purposes was 134,500. The difference will reverse evenly over the next three years (2022-2024) The tax rate in 2021 is 20% and no tax rate changes have been enacted that affect the years 2022 – 2024. Required: Determine taxable income for 2021 and 2022.Determine the deferred income taxes at the end of 2021, and prepare the journal entry to record income taxes for 2021.Determine the deferred income taxes at the end of 2022, and prepare the journal entry to record income taxes for 2022.Prepare the Income Tax section of the income statement, starting with Pretax Net Income and ending with Net Income after Taxes for both 2021 and 2022.

Deferred tax asset: The deferred tax asset is created when the taxes to be paid as per income tax…

Answered: Charlotte, Inc. began business on…

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Charlotte, Inc. began business on January 1, 2021. Its pretax financial income for the first two years was as follows:

2021 $550,000

2022 590,000

The following items caused the only differences between pretax financial income and taxable income.

In 2021, the company terminated a top executive and agreed to 120,000 of severance pay. The amount will be paid $40,000 per year for 2021 - 2023. The 2021 and 2022 payments were made. For financial statement purposes, the $120,000 was expensed in 2021. For tax purposes, the severance pay is deductible as it is paid.

In 2021, the company reported depreciation expense in its financial statements of $82,000. Depreciation expense for tax purposes was 134,500. The difference will reverse evenly over the next three years (2022-2024)

The tax rate in 2021 is 20% and no tax rate changes have been enacted that affect the years 2022 – 2024.

Required:

Determine taxable income for 2021 and 2022.
Determine the deferred income taxes at the end of 2021, and prepare the journal entry to record income taxes for 2021.
Determine the deferred income taxes at the end of 2022, and prepare the journal entry to record income taxes for 2022.
Prepare the Income Tax section of the income statement, starting with Pretax Net Income and ending with Net Income after Taxes for both 2021 and 2022.

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