Question - The statements of profit and loss for Gardner Corporation for two years (summarized) were as follows:
20X4 20X5
Revenues $400,000 $360,000
Expenses 362,000 304,000
Pre-tax accounting income $38,000 $56,000
Taxable income (per tax return) $94,000 $56,000
The income tax rate is 38% in 20X4 and 40% in 20X5. The 20X5 tax rate was enacted in 20X5. For tax purposes, the following differences existed:
Expenses (given above) on the 20X4 and 20X5 statements of profit and loss include golf club dues of $20,000 annually, which are not deductible for income tax purposes.
Revenues (given above) on the 20X5 statement of profit and loss include $20,000 rent revenue, which was taxable in 20X4 but was unearned for accounting purposes until 20X5.
Expenses (given above) on the 20X4 statement of profit and loss include $16,000 of estimated warranty costs, which are not deductible for income tax purposes until paid in 20X6.
Required:
Explain whether each difference is a permanent or temporary difference.
Calculate income tax payable for each year.
Calculate income tax expense for each of 20X4 and 20X5. Also calculate the balance in the deferred income tax account at the end of 20X4 and 20X5.